The Delhi High Court on Tuesday questioned why service charges are recovered from consumers as an “additional” and “separate levy” when restaurants can instead increase their food prices.
A Bench of Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad said, “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 Bench’s observation came while it was hearing an appeal by the Centre against a July 20 order of the High Court staying its guidelines that prohibited hotels and restaurants from levying service charges automatically on food bills.
‘Wrong impression’
Additional Solicitor General Chetan Sharma, appearing for the Centre, argued that while the service charge is in the nature of a tip, the impression given to consumers is that it is a governmental levy or a governmental tax.
“The consumers face embarrassment when they don’t pay or they are asked to pay. This is the reason why we have received hundreds of complaints,” Mr. Sharma said referring to complaints received by the Department of Consumer Affairs (DoCA) by consumers who said they were forced to pay service charges.
The counsel appearing for restaurant associations stated that the service charge was not a government levy. He said the charge was levied for the benefit of the restaurant employees and was not a substitute for “tips”. The counsel argued when it is clarified by the restaurant that there would be a levy of service charge, it becomes a matter of contract.
To this, the Bench shot back saying, “[If] 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”.
The Bench also remarked that the levy of service charge was “very much connected with consumers” and not just with the employees of the restaurant.
The Centre and the Central Consumer Protection Authority (CCPA), in their appeal against the July 20 order of the High Court, said that the guidelines, which were admittedly issued in the public interest, were stayed without giving them reasonable and adequate opportunity to explain their position.
The CCPA said its July 4 guidelines, banning levy of the service charge was meant to prevent unfair trade practices and protect consumer interest. The CCPA also said that it had received many grievances on the National Consumer Helpline about restaurants and hotels including the service charge in the bill by default and not informing the customers that paying it is optional.
The background
On July 20, the High Court stayed the CCPA’s guidelines banning restaurants and hotels across the country from levying service charge by default on food bills. The order came while hearing pleas by the National Restaurant Association of India (NRAI), Federation of Hotels and Restaurant Associations of India (FHRAI), as well as restaurant owners and promoters.
The NRAI, with approximately 7,000 restaurant members across the country and close to 2,500 member outlets in the National Capital Region, had said that levy of service charge has been a standing practice in the hospitality industry for more than 80 years.
The association had stated that in the absence of service charge, tips are generally paid by the customers normally equivalent to 10% of the amount of the invoice.
“This amount is pocketed by the waiters/stewards who come in direct contact with the customer. This results in deprivation of any components of the tips going to the back of the house staff including chefs/cooks /utility workers and others involved in procurement of raw materials, preparation of foodstuff and service to the customer,” the NRAI’s plea read.
The association said that the restaurants ensure pointwise distribution of the service charge collected from the customers to the entire staff, including the backend staffers, whose contribution is thus recognized and acknowledged.
The High Court has listed the matter for further hearing on August 18.
