‘Unfair Trade Practices’: Delhi High Court Says Restaurants Can’t Enorce Service Charges

In a significant ruling that upholds consumer rights, the Delhi High Court has banned restaurants and hotels from automatically adding a “service charge” to food bills. The court upheld the 2022 guidelines issued by the Central Consumer Protection Authority (CCPA), stating that such charges infringe upon consumer rights and create unfair pricing.

Service Charge Must Be Voluntary, Not Mandatory

Justice Prathiba M Singh, who delivered the ruling, stated that customers should only be required to pay for the food they order, without any additional charges being imposed by default. In her detailed 131-page judgment, she clarified that a service charge—often considered a “tip”—must be a voluntary payment and cannot be enforced as mandatory.

“A mandatory levy of service charge by restaurant establishments is against public interest and undermines the economic as well as social fabric of consumers as a class. It imposes an additional financial burden on customers and distorts the principle of fair trade as the customer is mandatorily asked to pay the same, regardless of the consumer’s satisfaction,” she stated.

Reinforcing this point, she added, “Service charge or TIP, as is colloquially referred to, is a voluntary payment by the customer. It cannot be compulsory or mandatory.”

New Nomenclature for Service Charge Suggested

While the court upheld the CCPA’s guidelines, it suggested that the term “service charge” be replaced with something clearer, such as “voluntary contribution” or “staff contribution.” The court noted that many customers mistake service charge for government-imposed taxes such as GST.

Legal Battle Over Service Charge

The ruling came in response to petitions filed by the National Restaurant Association of India (NRAI) and the Federation of Hotel and Restaurant Associations of India (FHRAI), who argued that service charges had been a standard practice in the hospitality industry for over 80 years. Their legal representatives, advocates Lalit Bhasin and Sameer Parekh, contended that there was no specific law prohibiting service charges.

The Union Ministry of Consumer Affairs, represented by Additional Solicitor General Chetan Sharma and advocate Ashish Dixit, defended the CCPA’s guidelines, emphasizing that consumers should not be compelled to pay extra charges they did not agree to.

Court Rejects Industry Arguments, Imposes Fine

Dismissing the petitions, the court also imposed a fine of ₹1 lakh on each of the petitioners, to be deposited with the CCPA.

Justice Singh rejected the argument that the guidelines were merely recommendations and held that the CCPA had the legal authority to enforce them under the Consumer Protection Act.

She further dismissed claims that restaurants have the right to set their own pricing, stating that business rights cannot override consumer protection. “The principle that the benefit of larger interest of 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 order read.

No “Implied Contract” Between Customers and Restaurants

Another key argument made by restaurant owners was that customers entering a restaurant where service charges were displayed on menus automatically agreed to pay them. However, the court ruled that such an arrangement does not constitute a valid “implied contract.” It further stated that forcing customers to pay an additional charge without their explicit consent amounts to an unfair business practice.

Reactions from the Hospitality Industry

Many in the restaurant industry have expressed concerns about the impact of this ruling.

Radhika Khandelwal, chef-owner at Fig & Maple in Delhi, shared her thoughts with Hindustan Times: “The service charge is anyway optional. It’s not mandatory. We notice that once restaurants reopened post-Covid lockdown, people opted to pay service charge but it’s reduced. What this does is dampen the spirit of the staff… This money doesn’t go to the owner or the business. Changing nomenclature too will ensure that fewer people opt to pay this.”

What This Means for Consumers

With this ruling, consumers in Delhi can now refuse to pay any service charge that is automatically added to their bill. If a restaurant attempts to impose it, customers have the right to challenge the charge and report the violation to consumer authorities.

The Delhi High Court’s decision sets a strong precedent for transparency in billing and ensures that dining out does not come with hidden charges. Moving forward, restaurants may have to rely more on direct tipping rather than a mandatory service charge to support their staff.