Delhi High Court Upholds Ban On Automatic Service Charge In Restaurants And Hotels

The Delhi High Court has upheld the guidelines issued by the Central Consumer Protection Authority (CCPA) that prohibit hotels and restaurants from automatically imposing service charges on customers. The court ruled that making service charges mandatory violates consumer rights and constitutes an unfair trade practice.

Justice Prathibha M Singh, delivering the verdict, emphasized that service charges and tips are voluntary payments, and no establishment can compel customers to pay them. She stated that the automatic inclusion of a service charge in the bill deprives consumers of their right to choose and amounts to an unfair business practice. The court further asserted that such charges should not be added to the bill by default but should be left entirely to the discretion of the customer.

Highlighting the importance of consumer rights, the court maintained that the rights of customers take precedence over those of restaurant establishments. It reiterated that the CCPA serves as a regulatory authority responsible for safeguarding consumer interests and has the power to issue guidelines for their protection. Justice Singh clarified that the CCPA is not merely an advisory body but has the authority to enforce regulations to prevent unfair trade practices.

The National Restaurant Association of India (NRAI) and the Federation of Hotels and Restaurant Associations of India (FHRAI) had challenged the guidelines, arguing that levying a service charge was a global practice and did not constitute an unfair consumer practice. They contended that the charge was a traditional industry practice and was transparently displayed on menu cards and within the premises. The petitioners further argued that the CCPA had no jurisdiction to prohibit service charges without adhering to the principles of natural justice and that such guidelines should only be advisory in nature. They also claimed that service charges benefited restaurant staff and aligned with the fundamental right of business owners to conduct trade and commerce.

The CCPA, however, maintained that imposing a mandatory service charge over and above the price of food and applicable taxes was illegal, as no additional service was specifically provided to customers in return.

In July 2022, the high court had initially stayed the enforcement of the CCPA guidelines but prohibited restaurants and hotels from automatically adding service charges to bills. The court directed members of the restaurant associations to clearly inform customers about service charges, ensuring transparency in pricing.

Later, in September 2023, the court instructed restaurants to use the term "staff contribution" instead of "service charge" and mandated that this charge should be explicitly mentioned on menu cards. Additionally, it imposed a cap, preventing restaurants from charging more than 10% of the bill under this category.

With the latest ruling, the Delhi High Court has reinforced consumer rights, ensuring that service charges remain optional and entirely at the discretion of the customer.