Service charge cannot be mandatory or compel a tip; practice is misleading and deceptive and violates consumer rights: Delhi High Court upholds CCPA guidelines
Kiran Raj
The High Court of Delhi held that the mandatory collection of service charges by restaurants amounts to an unfair trade practice and violates consumer rights. The Single Bench of Justice Prathiba M. Singh, delivering the judgment, observed that “consumer rights cannot be subjugated to an argument that a contract is being entered into by the consumer while entering the establishment to pay service charge”. The Court concluded that the Central Consumer Protection Authority (CCPA) was fully empowered under Section 18(2) of the Consumer Protection Act, 2019 (CPA, 2019), to issue the challenged guidelines and directed all restaurant establishments to comply.
The petitioners in the matter were associations and individuals representing restaurant establishments who challenged the guidelines dated 4 July 2022 issued by the CCPA. The guidelines prohibited the compulsory imposition of service charges and required that any such charge must be voluntary and not imposed as a condition of service. The petitioners contended that the practice of levying service charges was standard in the hospitality industry and that it formed part of the contract between the customer and the restaurant. They argued that the guidelines violated their fundamental rights under Article 19(1)(g) of the Constitution and lacked statutory backing.
It was submitted that the practice of imposing a service charge had long been recognised by trade practice and judicial pronouncements, including decisions of the erstwhile Monopolies and Restrictive Trade Practices (MRTP) Commission. Reference was made to the judgment in S.S. Ahuja v. Pizza Express, wherein the MRTP Commission had held that the levy of service charges was neither deceptive nor unfair as long as it was disclosed upfront to the consumer. Petitioners submitted that consumers had full knowledge of the charge before placing an order, as it was disclosed on the menu card and at the entrance of the restaurant. They further submitted that the collection of service charges was supported by industry standards, and the amount collected was often used for employee welfare and distributed among staff.
In response, the Union of India and the CCPA opposed the petitions. They submitted that the CPA, 2019, empowers the CCPA under Section 18(2)(l) to issue guidelines in furtherance of consumer rights. The respondents argued that mandatory imposition of service charges, even if disclosed, amounted to coercion and misrepresentation. It was stated that such charges mislead consumers into believing they are paying a government levy such as service tax or GST. The respondents also relied on decisions from various consumer commissions, including Rajashekar v. AnTeRa Kitchen and Bar, Arkadeep Sarkar v. Yauatcha Kolkata, and G. Thabre Alam v. M/s Buhari Hotel, where mandatory service charges were directed to be refunded and compensation awarded.
It was submitted that the voluntary nature of a tip is fundamentally distinct from a compulsory service charge. The respondents stated that “there are no documents filed on record by the Petitioners to show in what manner service charge is collected and is disbursed to employees”, and that the mere assertion that the amount is used for staff welfare was insufficient in the absence of concrete evidence.
The CCPA maintained that it had acted within its authority to protect consumer rights under the CPA, 2019, particularly in light of misleading practices and lack of informed consent. It was further contended that even if such charges were disclosed on the menu card, the practice remained misleading and unfair if it was not truly voluntary.
Justice Prathiba M. Singh held that the CCPA guidelines are valid, lawful, and binding. The Court recorded that “every business has to be run in accordance with law. If any particular practice is unfair towards a consumer or a class of consumers, the same cannot be permitted.” The Court agreed with the CCPA’s position that mandatory service charges constituted unfair trade practices under Section 2(47) of the CPA, 2019, and deceptive practices under Section 2(28).
The Court examined prior precedents and rejected the reliance on MRTP Commission judgments. It recorded that in the case cited by the petitioners, S.S. Ahuja v. Pizza Express, the Commission had not considered evidence that is now relevant in light of statutory changes brought by the CPA, 2019. It noted that “in the present case, however, no such approval has been granted by the Ministry of Tourism towards collection of the service charge”.
The Court noted a shift in consumer law jurisprudence, observing that several consumer commissions have directed the refund of mandatory service charges and awarded compensation for harassment. In paragraph 160, the Court stated: “The law has undergone substantial changes after the enactment of the CPA, 2019 where services have been included and the definition of unfair trade practice has also been expanded consequently.”
On the issue of contractual consent, the Court observed in paragraph 161 that such practices cannot be legitimised merely by arguing that the customer voluntarily entered into the contract. It stated: “The global nature of the practice of collecting service charge by restaurant establishments would not provide a defence to the Petitioners inasmuch as the practices in other countries cannot form the basis of quashing of Guidelines issued in India in accordance with law.”
The Court addressed a U.S. decision in Compere v. Nusret Miami, LLC, cited by the petitioners. In that case, an 18% service charge was collected for redistribution under U.S. labour laws. The Court observed that “the establishment succeeded in view of the labour law regulations prevalent in the said jurisdiction”, which did not apply to Indian consumer protection law.
In paragraph 170, the Court identified three core issues with the collection of service charge: (i) it is mandatory and cannot be waived even at the consumer’s request, (ii) the terminology used misleads consumers, and (iii) it is not disclosed transparently to the consumer. The Court agreed with the CCPA that these factors render the practice unfair and deceptive.
The Court noted that while businesses are free to price products and services as they deem fit, they cannot do so in a manner that misleads or coerces consumers. The judgment recorded: “Establishments are free to include the charge for their services within the charge for the products itself.”
The Court upheld the validity of the guidelines issued by the CCPA and held that they are enforceable under the CPA, 2019. It recorded in paragraph 174: “The CCPA is the authority fully empowered and has the jurisdiction to pass the guidelines under the CPA, 2019. In fact, issuing guidelines in consumer interest is an essential function of CCPA under Section 18(2)(l).” The Court further stated that the guidelines did not violate Article 19(1)(g) as they were issued in the interest of consumers and within the framework of law.
It was held that “service charge or TIP as is colloquially referred, is a voluntary payment by the customer. It cannot be compulsory or mandatory.” The Court stated that such practices are “misleading and deceptive in nature” and constitute an “unfair trade practice under Section 2(47) of the CPA, 2019.”
The Court rejected the argument that the charge was part of labour agreements, stating: “Justification… is not supported by any material on record and the same is accordingly rejected.”
While holding that mandatory collection of service charge is contrary to law, the Court clarified that consumers are free to voluntarily pay tips. It stated: “The amount however, ought not to be added by default in the bill/invoice and should be left to the customer’s discretion.”
Finally, the Court suggested that the CCPA consider modifying the nomenclature, stating: “The use of the word ‘service charge’ is misleading as consumers tend to confuse the same with service tax or GST or some other tax which is imposed and collected by the government.”
The Court directed: “All restaurant establishments would have to adhere to the guidelines passed by the CCPA. If there is any violation of the same, action would be liable to be taken in accordance with law.” The Court imposed costs of ₹1,00,000 on each petitioner, to be deposited with the CCPA and utilised for consumer welfare.
Advocates Representing the Parties
For the Petitioners: Dr. Lalit Bhasin, Ms. Nina Gupta, Ms. Ananya Marwah, Mr. Devvrat Tiwari, Mr. Ajay Pratap Singh, Mr. Sameer Parekh, Mr. Sumit Goel, Ms. Sonal Gupta, Ms. Swati Bhardwaj, Mr. Abhishek Thakral
For the Respondents: Mr. Chetan Sharma, Additional Solicitor General with Mr. Sandeep Mahapatra, Central Government Standing Counsel, Mr. Ashish Dixit, CGSC, Mr. Abhinav Bansal, Mr. Vikramaditya Singh, Mr. Tribhuvan, Mr. Shubham Sharma, Mr. Saurabh Tripathi, Mr. Amit Gupta, Mr. Ishan Malhotra, Mr. Chandan, Mr. Deepak Tanwar, Government Pleader, Mr. Shivam Tiwari; Mr. Kirtiman Singh, Senior Advocate for Union of India.
Case Title: National Restaurant Association of India v. Union of India & Anr.
Neutral Citation: 2025:DHC:2084
Case Number: W.P.(C) 10683/2022 & W.P.(C) 10867/2022
Bench: Justice Prathiba M. Singh
[Read/Download order]
