'How Can You Charge Customers Above MRP? Why Is Extra Amount Not Part Of Service Charge?' Delhi High Court Asks Restaurant Body

The Delhi High Court on Friday questioned the National Restaurant Association of India (NRAI) as to how the hotels and restaurants can charge customers for a food item over and above the MRP, and why the extra amount does not form part of the service charge- which is charged as a separate category.

The query came from a division bench comprising Chief Justice DK Upadhyaya and Justice Tushar Rao Gedela which was hearing the appeal filed by NRAI and Federation of Hotels and Restaurant Associations of India (FHRAI) against a single judge ruling which held that service charge and tips are voluntary payments by consumers and cannot be made compulsory or mandatory on food bills by restaurants or hotels.

At the outset, ASG Chetan Sharma appearing for the Central Government said that despite the single judge order, some of the restaurants were still charging service charge on the customers “using their so called sovereign power.”

Senior Advocate Sandeep Sethi representing NRAI submitted that the Central Consumer Protection Authority's (CCPA) is not a price control authority and that service charge is levied for the services being rendered by a restaurant to its customers.

On Court's query as to under which law the restaurants can levy service charge on customers, Sethi responded that it is a matter of contract between the consumer and the restaurant.

“There is no law. My menu is an invitation to offer. The customer walks into my restaurant. There is no compulsion,” he said.

Sethi submitted that a restaurant has the power to decide at what rate it will offer foods and services to the customers and that no law prescribes a prohibition for the price to be charged.

“It is not compulsory (for the customer) to avail the foods and services. There is no compulsion that he must entertain himself at my restaurant or avail the services. If it does not suit you, you can go to any other restaurant without a service charge,” he said.

He further added that service charge is only levied on those who avail services at the restaurant and is not levied for those option for delivery. It is only for the services in the restaurant, he said.

To this, the CJ said that how does a restaurant charge Rs. 100 for a water bottle when its MRP is Rs. 20 and what is the mechanism by which such MRP is regulated.

To this, Sethi responded that MRP is regulated under the Legal Metrology Act. At this stage, CJ asked Sethi:

“Suppose you are serving water (to a customer), you are providing service, accommodation, place to sit and serving the customer. For that you are charging service charge. In what authority you are charging over and above the MRP? For serving you are taking service charge. It is understandable. But under what authority are you charging the customer over and above MRP?”

Sethi said that the extra amount is being charge for the experience a customer gets at a restaurant, including the ambience.

Responding to this, CJ remarked:

“Service charge does not include the hospitality by you? If a customer goes to your restaurant and sits there, orders a bottle of water. For this alone you will charge service charge? Then for what are you charging MRP? For example you are providing chair to them, you are giving them space, permitting them to spend time, for enjoying music played for you, for that you are charging service charge?… You are entitled to sell water bottle and provide service. It will include space to sit, spending good time etc. For all this you are charging service charge? There are three components according to you - price of food, hospitality and service to the customer. If you don't include the money charged by you for the food item over and above the MRP, then what is this head (service charge)?”

The judge continued: “The difficulty arises when you say that apart from MRP, you are charging extra amount for goods sold and in addition to that you are charging service charge. Under the Rules (weights and measures), no one is entitled to sell any item over and above the MRP but you are selling it. You say you are charging extra for experience at the restaurant and you are charging on three components- price of food item, ambience and experience and for services provided by you. This service charge should include that also. Why are you quoting it in your menu that instead of Rs. 20 for a bottle, you are charging Rs. 100, without expressing Rs. 80 is extra for ambience?”

The judge questioned Sethi as to how the restaurant can charge a customer for ambience separately and not include the amount in service charge only.

“And if you are charging service charge, then what is this Rs. 80 for? You go to a restaurant, it displays on the menu that Rs. 100 is for a bottle of water. This is over and above…GST plus service charge. You buy the bottle and you stay there, enjoy the ambience, have experience of the lights etc. and then you are given the bill. It contains Rs. 100 for bottle, plus Rs. 10 for service charge. If you cannot sell that bottle of water over and above the MRP, then what are you charging extra Rs. 80 for? Will providing ambience be not included in the services you are providing?”

The matter will now be heard on September 22. The Court said that it will decide the matter finally and will not go on interim relief.

In March, the single judge rejected the pleas filed by the restaurant bodies challenging CCPA guidelines of 2022 prohibiting hotels and restaurants from levying service charges “automatically or by default” on food bills.

Upholding the guidelines, the single judge had dismissed the writ petitions with Rs. 1 lakh each to be deposited with CCPA for utilization for consumer welfare.

The single judge had clarified that mandatory collection of service charge on food bills is contrary to law and if consumers wish to pay any voluntary tip, the same is not barred. The amount however, ought not to be added by default in the bill/invoice and should be left to the customer's discretion, it added.

The single judge had observed that the manner of enforcement of payment of service charge is coercive in nature as in some cases, it is confused by the customers with service tax or a mandatory tax imposed by the government.

It had held that collecting a mandatory service charge as a matter of default without giving a choice to the consumer, cannot be contended to be contractually binding in nature.

The single judge had asked the CCPA to consider permitting change in the nomenclature for Service Charge which is nothing but a 'Tip or a gratuity or a voluntary contribution'. It said that terminology such as 'voluntary contribution', 'staff contribution', 'staff welfare fund' or similar terminology can be permitted.

Title: National Restaurant Association v. Union Of India & Anr