2025 (4) TMI 65 - HC - Indian Laws

Restaurants cannot impose mandatory service charges on customers, guidelines upheld as binding regulations

Delhi HC upheld CCPA guidelines prohibiting mandatory service charges by restaurants under Consumer Protection Act, 2019. Court ruled that compulsory ... Levy of service charges - Whether the collection of mandatory Service Charge by restaurants and other establishments is permissible under the Consumer Protection Act, 2019? HELD THAT:- One of the most important features of the CPA, 2019 is the establishment of the CCPA, which is a regulator for protection and enforcement of the rights of consumers. The CCPA is established under Section 10 of the CPA, 2019 as a regulator to regulate matters relating to violation of the rights of consumers, unfair trade practices and false or misleading advertisements which are prejudicial to the interest of the public and consumers. The CCPA is also established to promote, protect and enforce the rights of consumers as a class. The CCPA consists of a Chief Commissioner who manages the body along with other Commissioners. It consists of an investigation wing as provided under Section 15 of the CPA, 2019. The purpose of the investigation wing is, inter alia, to conduct an inquiry and investigation as may be directed by the CCPA. The CCPA under Section 16 of the CPA, 2019 can also make a complaint or refer a matter to the District Collector for enquiry or investigation regarding violation of rights of consumers as also into unfair trade practices, misleading advertisements, etc. The District Collector under Section 16 of the CPA, 2019 is to then submit a report to the CCPA in respect of the said complaint or reference. In Poonam Verma v. Delhi Development Authority [2007 (12) TMI 551 - SUPREME COURT] it was held that guidelines which do not have statutory backing, remain advisory. However, in the present case the guidelines do have proper statutory backing. The CCPA, established under Section 10 of the CPA, 2019 has the mandate of law to pass the impugned guidelines in the interest of consumers as a class. It is trite law that a regulation issued under a statute is valid law. The Supreme Court in the judgment Sukhdev Singh and Others v. Bhagatram Sardar Singh Raghuvanshi and Another [1975 (2) TMI 111 - SUPREME COURT] while deciding on the validity of regulations framed under the Oil and Natural Gas Commission Act, 1959, the Life Insurance Corporation Act, 1956 and the Industrial Finance Corporation Act, 1948 held that the same have force of law. The Supreme Court while holding this, inter alia observed that the powers of statutory bodies are derived, controlled and restricted by the statutes which create them. Further, the vires of law is capable of being challenged if the issuing authority lacks statutory backing. However, if the same derives authority from a statute or regulation, it is valid. The Supreme Court in Karnataka Live Band Restaurants Association v. State of Karnataka and Others [2018 (1) TMI 1521 - SUPREME COURT] upheld the constitutionality of ‘The Licensing and Controlling of Places of Public Entertainment (Bangalore City) Order 2005’ issued under the Karnataka Police Act, which meant to regulate and license, places of public entertainment like live band restaurants, discotheques, cabarets halls, etc. This was done while dismissing the appeal made by Karnataka Live Band Restaurants Association wherein it was inter alia held that the Court while deciding such cases, has to do the same on the touchstone of, whether the restrictions imposed are reasonable in the interest of general public or not. Applying the doctrine of proportionality to the present case, it is found that the limitation on rights of the restaurant establishments is constitutional as the same is proportional to the purpose sought to be achieved i.e., the larger consumer interest. The impugned guidelines are a just means to achieve the said purpose and hence, cannot be held to be unconstitutional. Can restaurant establishments levy and collect service charge mandatorily, by simply displaying the same on its menu card? Would this amount to unfair trade practice and would this be violative of rights of consumers? - HELD THAT:- The customers who visit such establishments could be simply walk-in customers or even customers who make a conscious choice to visit an establishment. In either case, once the customer enters the establishment, it is unlikely that any customer would go away merely upon seeing the menu card. Once the customer has been handed the menu card, the focus is on ordering of the food. Most customers opt for the food joints of their choice based upon the approximate cost that they may incur, depending on the occasion – whether a celebration of a special occasion, a relaxing meal with friends or family, a formal meal with professional associates or colleagues etc., This assessment is based on the price printed on the menu card for the food. However, what invariably happens in most establishments is that after the food is charged, service charge of 10% - 12% is added by default and taxes are charged over and above the said amount. In the present case, even if an implied contract is deemed to exist between the consumer and the restaurant establishment, upon the consumer placing an order after being informed about the service charge, it would be rendered void. This is because consumers, at this scale, have little bargaining power against restaurant establishments as a class. The Court is of the opinion that the said class requires to be protected with the intent to secure social and economic justice. Such a view is also in consonance with Article 14 of the Constitution of India. Thus, an implied contract on the basis of so-called information cannot constitute a validly enforceable contract as the same would be an unfair contract as per the Act itself. The CCPA while issuing the impugned guidelines has performed its functions within the four corners of the CPA, 2019 and not outside the same. The said guidelines though termed as guidelines are not optional guidelines but are mandatory guidelines which have to be followed. These guidelines emanate from the overarching authority vested in the CCPA, which is established under the CPA, 2019 for taking appropriate steps to defend rights of consumers and thus, it cannot be argued that the same are merely executive instructions which are not binding on establishments. The guidelines framed by the CCPA are thus valid and are in the interest of the consumers and the same are upheld. Conclusion - i) The CCPA is fully empowered to issue guidelines under the CPA, 2019, and these guidelines are enforceable as they have statutory backing. ii) The mandatory collection of service charges by restaurants is an unfair trade practice and constitutes an unfair contract under the CPA, 2019. iii) Service charges cannot be made compulsory, and consumers must have the discretion to decide whether to pay them. iv) The guidelines issued by the CCPA are valid and in the interest of consumers, and all restaurant establishments must adhere to them. Petition dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe primary legal issues considered in this judgment are:(i) Whether the Central Consumer Protection Authority (CCPA) can issue the impugned guidelines to hotels and restaurants regarding the collection of service charges.(ii) Whether hotels and restaurants can levy service charges on customers.(iii) Whether the service charge can be made compulsorily payable by customers.(iv) Whether the amount collected can be called 'Service Charge'.2. ISSUE-WISE DETAILED ANALYSIS(i) Authority of CCPA to Issue Guidelines:- Relevant Legal Framework and Precedents: The Consumer Protection Act, 2019 (CPA, 2019) establishes the CCPA under Section 10, empowering it to protect consumer rights and prevent unfair trade practices. Section 18(2)(l) authorizes the CCPA to issue guidelines to prevent unfair trade practices and protect consumer interests.- Court's Interpretation and Reasoning: The Court found that the CCPA is empowered to issue guidelines under the CPA, 2019. The guidelines have statutory backing and are enforceable, as they are issued under the authority granted by the Act.- Conclusions: The guidelines issued by the CCPA are valid and enforceable as they are within the statutory mandate of the CCPA.(ii) Levying of Service Charges:- Relevant Legal Framework and Precedents: The CPA, 2019 defines unfair trade practices and unfair contracts. The Act aims to protect consumers from practices that impose unreasonable charges or conditions.- Court's Interpretation and Reasoning: The Court held that mandatory service charges constitute an unfair trade practice and an unfair contract under Sections 2(46) and 2(47) of the CPA, 2019. The imposition of service charges without consumer consent is misleading and deceptive.- Key Evidence and Findings: Complaints from consumers indicated coercive and misleading practices by restaurants in collecting service charges. The CCPA's guidelines aim to address these issues.- Conclusions: Mandatory service charges are contrary to consumer rights and constitute an unfair trade practice.(iii) Compulsory Payment of Service Charges:- Relevant Legal Framework and Precedents: The right to practice any profession or carry on any occupation, trade, or business is subject to reasonable restrictions under Article 19(6) of the Constitution of India.- Court's Interpretation and Reasoning: The Court found that the mandatory collection of service charges impinges on consumer rights and is not a reasonable restriction on the freedom of trade. The guidelines are a proportional measure to protect consumer interests.- Conclusions: Service charges cannot be made compulsory, and consumers must have the option to decide whether to pay them.(iv) Nomenclature and Misleading Nature of Service Charges:- Relevant Legal Framework and Precedents: The CPA, 2019 defines misleading practices and unfair trade practices. The use of the term 'service charge' can mislead consumers into believing it is a government levy.- Court's Interpretation and Reasoning: The Court held that the term 'service charge' is misleading and deceptive. Alternative terminologies such as 'voluntary contribution' or 'staff welfare fund' should be used to avoid confusion.- Conclusions: The use of the term 'service charge' is misleading, and restaurants should adopt alternative terminologies that accurately reflect the voluntary nature of the charge.3. SIGNIFICANT HOLDINGS- The CCPA is fully empowered to issue guidelines under the CPA, 2019, and these guidelines are enforceable as they have statutory backing.- The mandatory collection of service charges by restaurants is an unfair trade practice and constitutes an unfair contract under the CPA, 2019.- Service charges cannot be made compulsory, and consumers must have the discretion to decide whether to pay them.- The term 'service charge' is misleading, and restaurants should use alternative terminologies that accurately reflect the voluntary nature of the charge.- The guidelines issued by the CCPA are valid and in the interest of consumers, and all restaurant establishments must adhere to them.- The writ petitions are dismissed with costs, and the CCPA is free to enforce its guidelines in accordance with the law.