Taking service charge is 'Unfair trade practice', says Ram Vilas Paswan

Delhi High Court has directed the Federation of Hotel and Restaurant Association of India (FHRAI) to substitute the term 'service charge' with 'staff contribution' and impose a maximum limit of 10% on the charge applied to bills.

Justice Prathiba M Singh has also mandated that hotels and restaurants affiliated with FHRAI clearly state on their menus that tips are unnecessary after making staff contributions.

It's important to note that this directive does not extend to eateries linked with the National Restaurants Association of India (NRAI).

This ruling is a result of a petition filed jointly by FHRAI and NRAI in opposition to the guidelines set forth by the Central Consumer Protection Authority (CCPA) on July 4, 2022.

These guidelines barred hotels and restaurants from automatically including or defaulting service charges on food bills. Notably, the High Court had temporarily halted the enforcement of these guidelines on July 20, 2022.

FHRAI has consented to alter the wording and exhibit staff contributions on menus, whereas NRAI has not agreed to do so. Senior Advocate Sandeep Sethi, who represented FHRAI, clarified that there are no service charges applied to food deliveries to customers' homes.

The central issue before the court revolved around the authority of the CCPA to issue guidelines effectively prohibiting service charges. Justice Singh underscored that, even though CCPA has jurisdiction, the court was addressing this matter within its writ jurisdiction.

This was done in light of reports indicating that certain restaurants were imposing service fees as high as 20%, impacting the entire nation.

Karnataka government has directed the hotel and restaurant sector to display boards reading: 'No service charge will be collected here'.

U T Khader, Food and Civil Supplies Minister, said, "We will shortly convene a meeting of hotel industry representatives and apprise them about the Centre’s guidelines. The state government will come out with an order prohibiting hotels and restaurants from collecting service charge from customers."

The minister added that payment of service charge is left to the discretion of the customer.

Union consumer affairs minister Ram Vilas Paswan had said, "Our department’s view is that imposing service charge is an unfair trade practice and consumers need not pay. There is no definition of service charge in the law."

Endorsing Khader’s view, food and civil supplies secretary Harsh Gupta said, "Many hotels in Bengaluru and other cities have been taking customers for a ride by including service charge in the bill. Since there is no mention of service charge in the menu card and it is only mentioned in the final bill payable by the customer, it amounts to violation of fair trade practices."

However, Gupta said the state government does not have the power to take action against hotels and restaurants that continue to collect service charge.

He added, "Customers can approach consumer courts and get their grievances redressed."

Service charge on hotel and restaurant bills is "totally voluntary" and not mandatory, Food and Consumer Affairs Minister Ram Vilas Paswan said after the government approved guidelines on service charge.

Hotels and restaurants will not decide on service charge to be levied but it will be at a customer's discretion, the minister said, adding that these guidelines will be sent to states for necessary action.

Paswan tweeted, "The government has approved guidelines on service charge. As per the guidelines, service charge is totally voluntary and not mandatory now."

He added, "Hotels/restaurants should not decide how much service charge is to be paid by the customer and it should be left to the discretion of customer."

"Guidelines are being sent to states for necessary action at their ends," the minister tweeted.

As per the guidelines, the column of service charge in a bill will be left blank to customers to fill up before making the final payment.

A senior Consumer Affairs Ministry Official said, "If there is mandatory levy of service charge, customers can file a complaint in the Consumer Court."

Hefty fines and stringent action against violation cannot be taken at present as the current Consumer Protection Law does not empower the minister to do so, the official said.

However, the new Consumer Protection Bill under which an authority will be set up will have powers to take action, the official added.

In the wake of a statement issued by the Department of Consumer Affairs on Jan 02, 2017 implying Service Charge billed by restaurants are optional, the Hotel and Restaurant Association of Western India (HRAWI) has come out with a clarification to all industry stakeholders.

In a letter to the Department of Consumer Affairs, the Federation of Hotel and Restaurant Associations of India (FHRAI) the apex body of hotels and restaurants, has appealed for withdrawal of the advisory as it has been creating chaos and disruption in the smooth functioning of restaurants across the country.

The association has clarified that there is nothing illegal about levying the fee and has citied judgements by the National Consumer Disputes Redressal Commission, New Delhi which is the highest consumer forum of the country as well as by the Honorable Supreme Court, which have upheld the legitimacy of this practice.

Dilip Datwani, President, HRAWI, said, "Service Charge like any other charge is a proposal from the restaurant or an establishment to potential customers. It is for the customers to decide whether they wish to patronise the said restaurant or not. A restaurant or hotel may just as easily absorb the said service charge into the remaining charges being collected by it from the consumer (by simply including it in the prices on the menu). Service charge is considered a beneficial payment since it is meant for the benefit of the staff of the establishment. So, some establishments make a conscious choice to adopt a beneficial policy towards its staff members by assuring them a minimum tip which is a percentage of the rest of the charges."

The association has pointed out to cases in which the practice of levying a Service Charge has been upheld by the law. In one of the cases, the National Consumer Disputes Redressal Commission, New Delhi in Nitin Mittal vs. Pind Baluchi, (2012) NCDRC 444 the Association has been advised that such a practice is not an "unfair trade practice"” within the Consumer Protection Act. In another case, the Hon’ble Supreme Court too has specifically acknowledged the practice of including "service charge" in the bill by hoteliers and other cases in lower courts which too have recognized the practice.

Pradeep Shetty, Secretary, HRAWI & Chairman of legal matters subcommittee, FHRAI & HRAWI, said, "Service charge is the amount paid to the staff of the restaurant or other similar establishments. An establishment may choose to include this amount in the bill itself and the percentage may vary from 5 per cent to 15 per cent of the value billed. This is a common and accepted practice in India as well as several other countries. Service Charge is not a government levy, and is not to be confused with VAT or Service Tax. We regret that the department came out with such an advisory which is misleading and has built a wrong notion about hotels and restaurants amongst their customers. While consumer rights are paramount, the rights of individual establishments should not be impinged upon."

Datwani concluded, "Generally patrons do not pay tips once they see they have been charged for service. The Service Charges are justly distributed amongst not only the stewards, but to everyone from the chefs to the dishwashing helper. The rationale behind putting it in the bill as a separate charge is also to clearly disclose to the customer that a specified portion of the amount paid by them is being given to the staff of the establishment that has been serving the customer."