In a significant ruling on Friday, the Delhi High Court upheld the guidelines issued by the Central Consumer Protection Authority (CCPA), which prohibit the automatic levying of service charges by hotels and restaurants. The court declared that the mandatory imposition of service charges violates consumer rights and constitutes an unfair trade practice.
The guidelines, issued by the CCPA in July 2022, aim to prevent unfair trade practices and protect the rights of consumers against mandatory service charges. Justice Prathibha M Singh, in her verdict, emphasized that service charges and tips should be considered voluntary and not compulsory. “The imposition of a service charge in a mandatory manner violates consumer rights. Restaurants or hotels cannot automatically add these charges under various names as it amounts to unfair trade practice,” Justice Singh remarked.
The court further stated that the rights of consumers should take precedence over the interests of restaurant establishments, highlighting the CCPA’s role as a “guardian of consumer rights” with the authority to formulate protective guidelines. “The CCPA is not merely a recommendatory body; it possesses the power to issue guidelines vital for the protection of consumer rights,” she added.
The litigation arose from a challenge by the National Restaurant Association of India and the Federation of Hotels and Restaurant Associations of India (FHRAI). These petitioners argued that levying a service charge was a common international practice and not inherently unfair to consumers. They contended that the CCPA’s guidelines were arbitrary and beyond the agency’s jurisdiction, asserting that such charges were transparently displayed on menu cards and premises, thus making them legitimate.
However, the CCPA countered that any mandatory service charge added to the cost of food items and applicable taxes was unlawful, as it did not correspond to any separate, proportionate service provided to the consumers. Initially, in July 2022, the high court had stayed the guidelines but prohibited restaurants and hotels from automatically adding service charges. It required establishments to clearly display these charges alongside prices and taxes, clarifying the voluntary nature of such payments to customers.
In a subsequent order in September 2023, the court had directed restaurants to label the fee as a “staff contribution” and limited the charge to no more than 10% of the total bill, requiring clear disclosure on menu cards.
