The Tussle of Service Charges at Hotels and Restaurants: Pro or Anti Consumers

Introduction

For better protection of Indian consumers, the Central Government has enacted the Consumer Protection Act, 2019¹ (“the Act”) which came into force on 20-7-2020. The Act has ushered in wide range of consumer protection by broadening the ambit of market places like direct selling, e-commerce activities, online shopping and adding other required concepts such as product liability, unfair contracts, etc. In addition to these it also provides for the establishment of the Central Consumer Protection Authority² (CCPA) that exercises its duty towards protecting the consumer as a class from unfair trade practices, misleading advertisements and regulating issues related to consumer rights. Thus, while executing its responsibilities, the CCPA on 4-7-2022 issued the “Guidelines to Prevent Unfair Trade Practices and Protection Consumer Interest with Regard to Levy of Service Charge in Hotels and Restaurants”, against the levy of service charges by restaurants/hotels with a view to tackle the alarming concern of forcefully imposing service charges on the consumers. Wherein the National Restaurant Association of India (NRAI) challenged such claims before the Delhi High Court on the grounds that the service charges are based on the restaurant policy and is not illegal or involves unfair trade practices in any manner. The opinion of the Associations about the said guidelines has been that it has no legal basis and rather than being a positive addition to the functioning of the hospitality industry, it will be detrimental to the establishments and its workers. As a result, the present article attempts to analyse the ongoing controversy and obtain an in-depth understanding pertaining to the legality of the issued guidelines.

Delhi High Court on levy of service charges by restaurants/hotels

The NRAI challenged the guidelines by CCPA in the Delhi High Court by filing a writ petition vide National Restaurant Assn. of India v. Union of India³. The guidelines have been put on a stay by order dated 20-7-2022⁴, until the date of next hearing scheduled on 25-11-2022. For the time being, the Court directed that:

(i) it is the responsibility of the hotels/restaurants to prominently display on the menu card about the levy of service charge which shall depict the obligation of the consumers to pay accordingly; and

(ii) no service charge can be imposed on take away orders. In this regard, the Court sought responses from the Government (respondent in the present case).

Nonetheless, the decision by the High Court at present seems to be a preliminary order. In the light of which the guidelines have been stayed based solely on the petitioners’ contentions, referring expressly to two cases (Nitin Mittal v. Pind Balluchi Restaurant⁵ and S.S. Ahuja v. Pizza Express⁶) and two reports (Dewan Chaman Lal Committee, 1958⁷ and Wage Board Notification, 1964) which are suggestive and are not in accordance with the present legal changes.

Legality of the guidelines

The primary objective and intention of the Government to regulate this domain has been explicitly articulated. It is noteworthy that this industry is completely dependent on the consumer demands and interests, wherein the default imposing of service charges which clearly hampers and violates consumer rights will tend to have a grave impact on the establishments in some way or the other. The levy of service charges is often being confused by the innocent consumers to be levied by the Government. Whereas, it is completely voluntary on the part of the consumers, but they end up paying for it either by being forced or by being muddled. This practice thus, results to be an unfair trade practice. On the other hand, the existence of the service charges in itself does not have any statutory backup, the contention posed by the NRAI was that it has been into practice since more than 80 years. But a particular practice even though if it has been a part of past functioning needs to be reformed if it is detrimental to the rights and leads to serious concerns regarding its legality.

First, it should be known that the Goods and Services Tax (GST) framework implemented by the Government is wide enough in nature to cover service charges. As depicted by the name in itself “services” are included in it and moreover, when Section 15(2)(c)⁸ of the Central Goods and Services Tax (CGST) Act, 2017 is viewed carefully it can be observed that it is broad enough to cover service charges.

Second, even though the Associations claim that the amount collected is being distributed among the staff, but there are high chances that it is not. This issue has been even brought up by the Central Board of Taxes⁹ which clearly depicts the lack of transparency and deceitful practice going under the shadow of “service charges”. Due to the absence of any rule with reference to the maintaining of records and any manner in which it is distributed, it is highly likely that the amount collected in the name of the staffs are directly being added to the profits of the establishments without even reporting it. Thus, these guidelines are not only in the interest of the consumers but also the employees associated to this industry. Furthermore, there are long line of cases that adds up to the fact that the price of food and services are very well included in the sale price for the foods/goods¹⁰. Also, the establishments presently are making the service charges mandatory despite the fact that the consumer likes the rendered service or not, which even defeats the whole purpose of the aspect “deficiency in services” under the CPA, 2019.

Third, the Dewan Lal Committee Report on the basis of which the High Court has given the order is merely a report which puts forth a suggestion to the replacement of the tip system by service charges, however, there are numerous legal backing which elucidates that both these systems are completely different from each other. The former being completely voluntary, and the latter is a compulsory default payment. Similar view was taken in Sun-N-Sand Hotel (P) Ltd. v. State of Maharashtra¹¹. Moreover, the Madras High Court in Hotel Ashoka v. State of T.N.¹² rightly stated that there is no clear connection between the client who is serviced by an employee and the entire group of employees to whom the perks are given. The customer might not be aware of the establishment’s employee count, their job titles and pay scales, or the real services they provide. There are also high chances that the consumers end up paying for those services that he/she not even availed of. Which is clearly the violation of the consumers’ rights.

Fourth, the levy of service charges particularly at hotels and restaurants will set a wrong precedent for the entire service sector. As it will pave way for every store, industry or establishment that provides any kind of service to charge for the same arbitrarily. This will lead to the hike in prices uncontrollably and the consumers will be compelled to bear with it by putting their rights and interests at a stake. In addition to that, the guidelines have been issued in public interest and for the protection of a large number of consumer rights and welfare. Thus, giving the clear signal towards authenticity of the guidelines.

Fifth, this practice of service charges also attracts the provision of Section 2(46)(vi), “unfair contracts”. The general rule implicates that a contract between a manufacturer or trader or service provider on one side and the consumer being on the other, consisting of such terms that leads to significant changes in the rights of such consumer is an unfair contract¹³. By the purview of sub-clause (vi) of the said section, the service charges being imposed on the consumer unreasonably and obligating them to pay for it irrespective of their likeness towards the services, which ultimately puts the consumer in a disadvantage, would be covered under Section 2(46)(vi)¹⁴. Herein, such charges being forcefully levied on the consumers, not only raises question regarding the excess prices that the consumers are being charged off but also its legitimacy.

Sixth, the Delhi High Court in Commr. VAT v. India International Centre¹⁵, provided a feasible arrangement for the tips collection. It expressly states the non-requirement of reflecting such charges in the bill. Instead, it states that the management who is collecting tips on behalf of its staff is merely a “trusty”, and the establishments can come up with a system wherein they pool all the tips and the same is distributed equally among the staff. This ultimately would be in the welfare of the hotel staff as well as the consumers. As the voluntariness involved in such charges will prevail and the tip collected can be distributed equally thus, upholding the aspect of socioeconomic angle, and eliminating any scope for unfairness.

Seventh, this ban can promptly be based on fulfilment of the legislative motive behind Section 171¹⁶ of the CGST Act, which prohibits profiteering by sellers or service providers. Earlier restaurant chains were all taxed under the service tax and State value added tax regimes, which used to differ along State lines. Now, with GST regime, uniformity of tax to be levied on the restaurants have been brought all over the country thus, there are great chances that at some parts of the country the taxes on consumers or restaurant goers would have got reduced due to the GST law. However, if the restaurant owner charges an extra service charge, the benefits of such a reduction of tax may not accrue to the consumer going against the intent of Section 171 of the CGST Act hence, the proponents of a uniform ban on service charge gain some grounds. Subsequently, even with the constitutional perspective, these guidelines can be exclaimed to be a right and necessary step in the interest of public justice.

Lastly, as per the report of Ministry of Consumer Affairs, GoI, more than 1100 complaints and consumer harassment cases have been filed in last couple of years specifically on levy of service charges,¹⁷ hence raising a serious cause of concern. Corroborating to the same, there have been judgments pronounced by the District Consumer Disputes Redressal Commission, like the matter of Arkadeep Sarkar v. Yauatcha¹⁸ and Amit Mahajan v. Brewmaster¹⁹ which dealt with the issue of consumer harassment and forceful imposing of service charges even if the consumer is not satisfied with the services. The Court in the said matters held the restaurants liable for gross unfair trade practice and deficiency in services²⁰. On the other hand, where the associations claim that there is no illegality associated to it, but the cases of misbehaviour, embarrassment, and clear violation of consumer rights by the establishments pushes the whole notion towards the illegal nature of this practice. It should also be noted that the survival of the industry depends on the growth of the consumer demands, these conducts by the hotels and restaurants are highly discouraged and gradually raise the need for a stricter scrutiny.

Conclusion

These guidelines are a milestone towards better accountability, protection of consumers’ rights and a safety net of the public welfare. Essentially, it brings a clarification among the consumers as to what charges are government levied and what are completely voluntary; and protects consumers further from harassments. With the implementation of these guidelines the consumers will not only know better about their rights but would also gain an understanding about the prices and taxes that they are being charged off. It will also act as a shield between those establishments that by default levy service charge in the name of its staff but does not distribute or maintain records of the same, resultantly, protecting the hotels/restaurants staff as well. Finally, the absence of a regulating body to ensure the authenticity of such charges, clearly leaves a door open for the CCPA to stop unfair trade practices. Hence, it is essential to enforce and ensure proper implementation of the issued “Guidelines to Prevent Unfair Trade Practices and Protection Consumer Interest with Regard to Levy of Service Charge in Hotels and Restaurants” by CCPA in spirit to protect the objectives of the CPA, 2019.