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Synopsis

The Delhi High Court, recently, held that a service charge is a voluntary payment made by the customer and cannot be made mandatory or compulsory. These observations were made in a writ petition filed by the National Restaurants Association of India (NRAI) and the Federation of Hotels and Restaurants Association of India (FHRAI), in which they contested the guidelines issued by the Central Consumer Protection Authority (CCPA). These guidelines prohibited the automatic or default inclusion of service charges and made their payment optional.

The bench of Justice Prathiba M. Singh held, “Service charge or TIP as is colloquially referred, is a voluntary payment by the customer. It cannot be compulsory or mandatory”. 

Background: 
The Central Consumer Protection Authority (CCPA), established under Section 10 of the Consumer Protection Act, 2019, received multiple complaints regarding restaurants and hotels imposing a mandatory service charge of 5-20% in place of gratuity. Additionally, Goods and Services Tax (GST) was levied on the service charge, thereby increasing the financial burden on consumers. To address this issue, the CCPA issued guidelines on July 4, 2022, explicitly prohibiting the automatic or default inclusion of service charges, making their payment optional, and forbidding their collection under any alternative nomenclature. The guidelines further prohibited restaurants from denying entry to consumers refusing to pay the charge and from imposing GST on it.

The petitioners contended that the guidelines infringed upon their rights under Article 19(1)(g) and adversely impacted the hospitality industry. It was argued that service charges represented a contractual arrangement between establishments and consumers, forming an integral part of the pricing structure. The petitioners further argued that the guidelines lacked statutory authority, violated principles of natural justice, and exceeded the CCPA’s jurisdiction. The Respondents, however, defended the guidelines, emphasizing concerns related to unfair trade practices and consumer protection.

The issue has to consider “Whether the collection of mandatory Service Charge by restaurants and other establishments is permissible under the Consumer Protection Act, 2019 (hereinafter, the ‘CPA, 2019’)?”. 

Analysis:
The court acknowledged that consumer transactions had historically been governed by the doctrine of Caveat Emptor, which placed responsibility on buyers. However, the principle of Caveat Venditor later emerged, shifting the burden onto sellers. Initially, sales were regulated by common law, and consumer grievances were addressed through tort claims. The Consumer Protection Act, 1986, established redressal forums for consumer disputes, and its 2002 amendments expanded jurisdiction to include services.

“The CPA, 2019 is, thus, a statute which has been enacted for the purpose of protecting the interest of consumers in the modern world”, the court observed. Furthermore, the rise of e-commerce necessitated the enactment of the Consumer Protection Act, 2019, which strengthened consumer rights, addressed misleading advertisements, and established the Central Consumer Protection Authority (CCPA) for enforcement.

The CCPA, constituted under Section 10 of the Consumer Protection Act, 2019, was tasked with regulating violations of consumer rights, unfair trade practices, and misleading advertisements. It comprised a Chief Commissioner, other Commissioners, and an investigation wing under Section 15. The CCPA possessed authority under Sections 16 and 19 to initiate inquiries, refer matters to the District Collector, and conduct investigations. Section 20 empowered it to enforce consumer protection laws, while Sections 21 and 22 granted it authority over misleading advertisements and search and seizure operations. Non-compliance with Sections 20 and 21 attracted penalties under Section 88.

The court rejected the petitioners’ contention that the guidelines violated their rights under Article 19(1)(g) of the Constitution. However, the court observed that these rights were subject to reasonable restrictions under Article 19(6). In balancing the rights of restaurant owners with consumer protection, the court held that while establishments had the right to set prices, imposing a mandatory service charge remained unjustified. Applying the doctrine of proportionality, the Court upheld the guidelines as reasonable and necessary for consumer protection.

“A law restricting the right of a citizen under Article 19(1)(g) of the Constitution of India has to cumulatively satisfy two distinct tests. First, it being in the interest of general public and second, it being a reasonable restriction. 2 The present guidelines satisfy the said tests as it is done in the interest of consumers as a class. The principle, benefit of larger interest of the society prevails over individual interest, fully applies to this case to reach the conclusion that the rights of consumers as a class would prevail over the right of restaurant establishments. The social and economic interest of the society as a whole is paramount”, the court highlighted. 

The petitioners further argued that service charges formed part of a contractual agreement, as customers were informed through menu cards. However, the court rejected this argument, reasoning that consumers primarily focused on food selection and might not notice such charges. It ruled that mandatory service charges were misleading and constituted an unfair trade practice. The court referenced precedents that highlighted the unconscionable nature of contracts with unequal bargaining power.

The court also added, “Once the customer has been handed the menu card, the focus is on ordering of the food. Most customers opt for the food joints of their choice based upon the approximate cost that they may incur, depending on the occasion – whether a celebration of a special occasion, a relaxing meal with friends or family, a formal meal with professional associates or colleagues etc”. 

Consumer complaints demonstrated that restaurants continued to impose service charges despite previous directives deeming them discretionary. Many establishments misrepresented these charges as government-mandated or part of GST. The court asserted that only the government held the authority to impose levies and ruled that mandatory service charges were unlawful. The Ministry of Tourism also disapproved of the practice.

“A consumer is conscious that apart from the amount mentioned on the menu card as the price of the product, the amount payable would only be such amount as is collected by the Government as a tax and nothing more. In fact, when a large number of food items are ordered, most consumers may not even notice the levy of the service charge that too in small print and may land up paying a much higher amount than what is chargeable. This constitutes unfair trade practice”, the court observed. 

The court upheld the validity of the CCPA guidelines, ruling that mandatory service charges violated consumer rights. It directed establishments to incorporate service costs into product prices instead of levying separate charges. The court dismissed the petitions, imposing costs of ₹1 lakh each, payable to the CCPA for consumer welfare.

For Petitioners: Advocates Lalit Bhasin, Nina Gupta, Ananya Marwah, Devvrat Tiwari and Ajay Pratap Singh
For Respondent: Additional Solicitor General Chetan Sharma, Senior Advocate Kiritman Singh, Standing Counsels Sandeep Mahapatra and Ashish Dixit with Advocates Abhinav Bansal, Vikramaditya Singh, Tribhuvan, Shubham Sharma, Saurabh Tripathi, Amit Gupta, Ishan Malhotra, Shivam Tiwari, Chandan with Government Pleader Deepak Tanwar
Case Title: National Restaurant Association of India v Union (2025:DHC:2084)