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NRAI Reiterates That There Is No Illegality On Levying Such A Charge

Wednesday, July 6, 2022, 11:33 Hrs  [IST]
HBI Staff | Hyderabad

The latest guidelines issued by CCPA has once again created unnecessary confusion amongst the consumers, leading to disruption in smooth business operations of Restaurants. Through these repeated guidelines, there is an attempt to start a campaign against this Restaurant Industry practice without any legal basis. It is also relevant to state that extra charges are being levied by many other Industries, including some Government agencies. However, the guidelines are issued only for Restaurant Industry.   


Service Charge is a part of the owner’s discretion / decision regarding the total price payable by a customer with regards to sale or service of a product. It constitutes one of the components of the total price of the product. Neither the Government nor any authority can interfere with the decision of the business owner in this regard. It is a universally accepted trade practice.


The customer is made aware of the pricing and its components before the customer places an order for the product. Once the customer places the order after being made aware of the terms and conditions there comes into existence a binding contract. No authority can interfere with binding nature of a valid contract until and unless it is shown and proved to be unconscionable or against any unfair trade practice.


The legality, reasonableness or justification of levying service charge has been considered by the Hon’ble Supreme Court of India, High Courts, National Consumer Disputes Redressal Commission, erstwhile Monopolies and Restrictive Trade Practices Commission and by the Income Tax Authorities (ITAT). The levy of service charge has been upheld in various judicial pronouncements. 


Levy of service charge also has a socio economic angle. Generally tips are paid to and pocketed by staff who serve the customers (waiters/stewards) and nothing is shared with those back of the house employees who contribute to the overall product/service. The system of service charge envisages point wise distribution even to the back of the house staff whose contribution is thus recognized and acknowledged in the form of a part of the service charge collected from the customer.


It is therefore the owner's discretion as to how to run its business and what policy should be put in place regarding pricing of the product. The Government cannot bring about a change insofar as a levy of service charge is concerned by making guidelines. Guidelines by the very nature of things are only for guidance and in case there is a need for such change, there has to be either a new law or an amendment in the existing laws.


Levy of service charge is beneficial for the workmen as a class who are employed in the establishments. Any move to the contrary would be detrimental to the interests of workers – and against the labour-friendly stance of the Government. 


Various judicial orders which recognize/uphold levy of Service Charge are as under:

National Consumer Disputes Redressal Commission, in Nitin Mittal vs. Pind Baluchi, (2012) NCDRC 444.
Mrs. S.S. Ahuja vs. Pizza Express, Monopolies and Restrictive Practices Commission, New Delhi (MRTP) decided on 10.12.2001.
Hon’ble Supreme Court judgments in the cases of Wenger & Company and others Vs. Their Workmen (1963) and Ram Bagh Palace Hotel, Jaipur Vs. The Rajasthan Hotel Workers Union, Jaipur (1976).
Hon’ble Supreme Court on 3.12.2007 in the case of Quality Inn Southern Star vs. Regional Director, ESI (C.A. No. 1250/2001).
Hon’ble Delhi High Court [Income Tax vs. ITC Ltd., (2011) 338 ITR 598].
Income Tax Appellate Tribunal [Rajinder Kumar Jain vs. ACIT, New Delhi, Order dt. 24.2.2015 in ITA Nos. 328-329. Del./2013]Iii

In fact the Monopolies and Restrictive Practices Commission, New Delhi (MRTP) observed in its decision on 10.12.2001 in the case of Mrs. S.S. Ahuja Vs. Pizza Express as under:


“Levy of service charges on the other hand cannot be questioned in law as there is no provision prohibiting levy of such charges. The menu card clearly mentions levy of extra service charges at 9% and the same is also displayed outside the restaurant providing information to the customer beforehand as well before the order is placed for food/meal. A customer who can read the order for the kind of dishes mentioned in the menu card as is the case, can very well read the conditions mentioned in the said card before placing the order for the food/meal. Non-reading of the same would necessarily be at his peril. There is thus no unfair practice or deceptive method adopted by the respondent as contended by the complainant. In fact, the extra levy at 9% would act as a disincentive to the promotion of sales, which is a prerequisite condition for holding the trade practice to be unfair.”

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