Why Should Consumers Pay Service Charge as 'Additional Levy'? Asks Delhi HC

The court told restaurant associations to increase their food prices but "don't levy it separately.”

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The Delhi High Court on Tuesday, 16 August, questioned why restaurants should recover service charges from consumers as an “additional” and “separate levy."

A bench headed by Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad remarked that a common man perceives service charge as a government levy and restaurants can increase their food prices to absorb this charge instead of recovering it in the form of an additional charge over and above the total bill.

The High Court was hearing an appeal by the Centre against a single judge's order staying its guidelines prohibiting hotels and restaurants from levying service charges automatically on food bills.

It listed the matter for hearing on 18 August.

Counsel appearing for one of the restaurant associations said that the service charge was not a government levy and it was for the benefit of the restaurant employees and was not a substitute for “tips”.

“You increase the salary. We will hear you,” stated the court which observed that the levy of service charge was “very much connected with consumers” and not just the employees of the restaurant.

“That (service charge as a government levy) is what a common man perceives. Increase your food price. No problem. Because you are entitled to fix a rate for your food but don't levy it separately,” the court told the restaurant associations.

‘Consumers Face Embarrassment When They Don’t Pay'

Additional Solicitor General Chetan Sharma, appearing for the appellant, said that while the service charge is in the nature of a tip, the impression given to consumers is as if it is a governmental levy or a governmental tax.

“The consumers face embarrassment when they don't pay or they are asked to pay. That is the reason hundreds of complaints were received,” he said.

Counsels appearing for restaurants said that the government does not prohibit service charges and when it is made clear by the restaurant that there would be a levy of service charge, it becomes a matter of contract.

“Can they compel a person to pay any kind of service charge? You are the master of your price but you can't then place an additional price that you pay an additional charge,” the court said.

“A person who does not know the law or an illiterate person goes to a restaurant, you mean to say he is entering into a contract? A person who does not understand law goes for a cup of tea, so he is entering into a contract and he has to pay the service charge,” it remarked.

ASG Sharma further assailed the single judge order on the ground that it was passed in violation of principles of natural justice.

In the appeal by the Centre as well as Central Consumer Protection Authority, the appellants said that the guidelines, which were admittedly issued in the public interest, were stayed without affording reasonable and adequate opportunity to the appellant to explain their position.

“The impugned order has been passed post-haste without appreciating that the guidelines have been issued for safeguarding the rights and interests of the consumers and seek to protect the consumers from unfair trade practices and violation of consumer rights due to mandatory collection of service charge and adding such charge automatically or by default in the food bill without allowing the consumer the choice or discretion to decide whether they want to pay the such charge or not,” the appeal said.

Since another appeal against the single judge order was yet to be listed, the counsel for the respondents urged the court to list the present case, which pertained to the petition by the Federation of Hotels and Restaurant Associations of India, for hearing on the same day.

The Background

On 20 July, the single judge stayed the 4 July guidelines prohibiting hotels and restaurants from levying service charges automatically on food bills while dealing with petitions by the National Restaurant Association of India (NRAI) and Federation of Hotels and Restaurant Associations of India.

The court, in its common order, had said that the stay is subject to the members of the petitioners ensuring that the levy of service charge in addition to the price and taxes and obligation of the customer to pay the same is duly and prominently displayed on the menu or other places.

Further, the members will also undertake not to levy service charges on any takeaway items, it had added. The NRAI claimed before the single judge that the prohibition under the 4 July order was “arbitrary, untenable and ought to be quashed” as it has been issued without an appreciation of the facts and circumstances.

“Levy of service charge has been a standing practice in the hospitality industry for more than 80 years which is evident from the fact that the Supreme Court took notice of this concept way back in 1964,” the petition had said.

“The levying of service charge has a socio-economic angle as well. The system of levying service charges ensures that there is a systematic and logical distribution of service charge collection amongst the employees and not just the employee serving the customer in the restaurant. This ensures that the benefit is divided equally among all the staff workers including the utility workers and back staff,” it had added.