Hotel, restaurant bodies challenge Delhi HC order on service charge

India’s restaurants and hotels associations have this weekend challenged a March order by the Delhi High Court that ruled that they can’t force customers to pay service charge or tips, sources confirmed.

The National Restaurants Association of India (NRAI), which represents over five lakh restaurants, said in its petition in the Delhi High Court that “there is nothing illegal in levying service charge and this transparent system is followed worldwide and does not amount to unfair consumer practice”, people directly aware of the development said.

The hotel associations also said that the service charge was to ensure equitable distribution of the tip amount, ET has learnt.

The matter is likely to come up for hearing before the division bench of the Delhi High Court on Tuesday.

When contacted, NRAI executives declined to comment.

Last month, the Delhi High Court had held that restaurants and hotels cannot force customers to pay service charges or tips, as it violates consumer rights. According to the ruling, paying service charges needs to be voluntary and cannot be enforced on consumers.

The contentious matter will directly impact consumers’ bills, either way.

Three industry executives ET spoke to said they are undecided whether to hike prices or not and cited “concerns on negative financial impact on staff, specially employees in cleaning, serving and kitchen jobs, who often receive combined service charge earnings monthly.”

NRAI president Sagar Daryani had told ET last week: “Given the steep impact of the service charge order, many restaurants are considering hiking menu prices anywhere between 5-8% at the earliest to ensure that staff are not left with a negative financial impact.” However, he added that the current downward trend of consumer sentiment and low demand on account of off-season backed by inflationary pressures has left the industry “with second thoughts on the price increase.”

The Federation of Hotel and Restaurant Associations of India (FHRAI), too is challenging the order in Delhi High Court, the executives mentioned above said.

“If this is implemented, our rentals would go up, as in many cases restaurants have a revenue share with the landlords. This is because for us to continue paying our employees what we earlier did, the menu price has to go up by 12-14%. Earlier, including service charge separately on the bill was clearly defined and that amount was not a part of total net sales. So this is like a double whammy,” the chief of a large restaurant chain said. He requested not to be identified.

Inflation in key commodities such as edible oil, cocoa, coffee and vegetables has dented restaurant margins over the past four quarters.

The court ruled last month that the service charge or tip, as it is referred, is a voluntary payment by the customer. “It cannot be compulsory or mandatory. The practice undertaken by the restaurant establishments of collecting service charge, that too on a mandatory basis, in a coercive manner, would be contrary to consumer interest and is violative of consumer rights,” the court had said.

The ruling had followed previous Central Consumer Protection Authority (CCPA) guidelines after it received complaints from consumers that restaurants and hotels were charging customers up to 5-20 per cent as service charge.

According to a report by the NRAI, India’s food services sector will touch sales of Rs 7.76 lakh crore by year 2028, compared to the present Rs 5.7 lakh crore.