Mandatory Service Charge in Restaurants Declared Unfair Trade Practice: Delhi High Court Upholds CCPA Guidelines

Mandatory Service Charge in Restaurants Declared Unfair Trade Practice: Delhi High Court Upholds CCPA Guidelines

Introduction

In Federation of Hotel and Restaurant Associations of India & Ors. v. Union of India & Anr. (Delhi High Court, 28 March 2025), petitioners representing the hospitality sector challenged CCPA guidelines issued on 4 July 2022. The Central Consumer Protection Authority (CCPA) had directed that restaurants must not automatically add a “service charge” to bills, must clearly inform customers that any such charge is voluntary, must not impose it as a condition for entry or service, and must not levy GST on it. The National Restaurants Association of India (NRAI) and the Federation of Hotel and Restaurant Associations of India (FHRAI) sought to quash these guidelines under Article 226, arguing violation of their rights under Articles 14 and 19(1)(g) of the Constitution and exceeding the CCPA’s statutory mandate.

Summary of the Judgment

Justice Prathiba M. Singh dismissed the writ petitions, holding:

  • The CCPA is duly empowered by Sections 10, 18 and 20 of the Consumer Protection Act 2019 to “issue necessary guidelines” to prevent unfair trade practices and protect consumer interest.
  • Mandatory levying of service charge violates consumer rights under Section 2(9)(ii) & (iv) and constitutes an unfair trade practice under Section 2(47) of the Act.
  • Service charges are voluntary tips, not a government levy or mandatory fee; misleading nomenclature and coercive collection practices harm consumers.
  • Restaurants remain free to price their offerings, but cannot add a hidden, compulsory “service charge” on top of menu prices and GST.
  • Any customer‑paid voluntary tip may continue, but must be left wholly to the consumer’s discretion, with no default addition or forced collection.

Analysis

1. Precedents Cited

  • Junior instances under the Consumer Protection Act 1986 (e.g., 2017 guidelines) had already declared mandatory service charges unfair.
  • Nitin Mittal v. Pind Balluchi Restaurant (NCDRC) held product pricing is contractual, but did not legalize default service charges.
  • Assistant Collector of Central Excise v. National Tobacco Co. (1972) affirmed that “levy” of a charge is a state function.
  • Prem ji Parmar v. DDA (1980) recognized freedom to price, but subject to statutory control—here the CCPA guidelines.
  • Modern Dental College (2016) and Karnataka Live Band Restaurants (2018) upheld reasonable restrictions on commercial freedoms in the public interest under Article 19(6).

2. Legal Reasoning

CCPA’s Statutory Mandate – Section 10 establishes the CCPA to protect consumer rights and prevent unfair trade practices. Section 18(2)(l) empowers it to issue “necessary guidelines.” Sections 19–20 prescribe enforcement by inquiry, investigation, recall orders, and penalties for non‑compliance.

Constitutional Balance – Article 19(1)(g) guarantees freedom of trade, but Article 19(6) allows reasonable restrictions “in the interest of general public.” The Court applied the proportionality test (Modern Dental College), finding these guidelines narrowly tailored to protect consumers who face hidden 10–20% mark‑ups and GST on top of menu prices.

Unfair Trade Practice & Unfair Contract – Mandatory default service charges mislead consumers on menu pricing and impose “unreasonable charge[s]” under Section 2(46)(vi). This violates the right “to be informed about … price of goods … so as to protect the consumer against unfair trade practices” (Section 2(9)(ii)). Hidden or abbreviated fee names such as “VSC,” “SC,” or “SRVCGH” compound the deception.

Contractual Arguments Rejected – Petitioners claimed an implicit contract binds customers who stay after seeing the menu. The Court held that inequality of bargaining power and lack of true customer choice make such “contracts” unconscionable, contrary to public policy and void.

3. Impact

  • Restaurants must remove any default or compulsory service‑charge line in bills and on menus, and inform patrons that contributions are entirely voluntary.
  • No GST may be levied on any voluntary tip or “staff contribution.”
  • Consumer Commissions and the CCPA may act against establishments that mislead patrons or coerce payment.
  • The hospitality sector must revise billing systems, menu disclosures, and staff‑welfare funding models to rely on genuine gratuities rather than enforced add‑on fees.
  • Sets a clear precedent that hidden fees and “mandatory tips” will be treated as unfair trade practices under the CPA 2019.

Complex Concepts Simplified

Unfair Trade Practice – Any business method that misleads customers on price or terms. Here, restaurants adding a hidden 10–20% fee on top of menu prices without real customer choice is unfair.

Reasonable Restriction – The Constitution lets the State limit business freedom (Article 19(1)(g)) if the public interest demands it. Rules on service charges are “reasonable restrictions” to protect consumers.

CCPA Guidelines – Not mere advice, but binding rules. The CPA 2019 empowers the CCPA to stop unfair practices, recall unsafe goods, and impose penalties. Restaurants must comply or face enforcement.

Conclusion

The Delhi High Court’s decision underlines a fundamental consumer principle: prices must be transparent and voluntary. While restaurants retain full freedom to set menu prices, they cannot surreptitiously tack on compulsory “service charges” and claim they are tips or government levies. The CCPA’s guidelines, grounded in the CPA 2019 and constitutional law, restore genuine customer choice and foster fair competition. From now on, any tip or contribution must be clearly voluntary, with no hidden fees or coercion—marking a new era of bill clarity and consumer empowerment in India’s hospitality industry.

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