Service Charge on Restaurant Bills is Not a Mandatory Tax: Delhi HC Directs CCPA To Revise Misleading Terminology [Read Order]

The Delhi High Court recently reaffirmed that the service charge levied by restaurants and hotels is not a mandatory tax, while directing the Central Consumer Protection Authority (CCPA) to consider revising the terminology on bills to avoid misleading unassuming consumers. The decision was given by the Delhi High Court while adjudicating two writ petitions filed by the National Restaurant Association of India & Ors. and the Federation of Hotel and Restaurant Associations of India & Ors.against the Union of India & Ors. Read More: Relief for ONGC: CESTAT Rules Pipeline Transportation Charges as Part of Sale Price, Quashes ₹4.56 Crore Service Tax Demand Want a deeper insight into the Income Tax Bill, 2025? Click here The case stems from the 2022 guidelines issued by the CCPA, which prohibited restaurants and hotels from levying service charges automatically or by default. The CCPA had received several complaints that restaurants were charging 5-20% of the bill amount in lieu of ‘Tip’ or ‘Gratuity’, from consumers on a compulsory basis, on top of the Goods and Services Tax (GST), resulting in substantial burden on the consumers. The guidelines sparked legal challenges from the Federation of Hotels and Restaurant Associations of India (FHRAI) and the National Restaurant Association of India (NRAI), which argued that service charge had been a long-established industry practice. The court had previously stayed the implementation of these guidelines but has now upheld them, dismissing the petitions and imposing a cost of Rs. 1 lakh on each petitioner, to be deposited with the CCPA for consumer welfare. The petitioner associations were represented by Lalit Bhasin, Nina Gupta, Ananya Marwah, Devvrat Tiwari, Ajay Pratap Singh, Sameer Parekh, Sumit Goel, Sonal Gupta, Swati Bhardwaj and Abhishek Thakral argued that service charge had been a longstanding industry practice for over 80 years and was neither arbitrary nor unlawful. Read More: CBIC Releases FAQs on ‘Restaurant Service’ Supplied at ‘Specified Premises’: GST Registration, Tariff & Declarations Included Clear all Your Doubts on RCM, TCS, GTA, OIDAR, SEZ, ISD Etc... Click Here It was further contended that customers were adequately informed about service charges through menu cards and notices displayed in restaurant premises, thereby ensuring transparency and that the guidelines issued by the CCPA were excessive, arbitrary, and amounted to regulatory overreach. On the other hand, Chetan Sharma, ASG with Sandeep Mahapatra, CGSC, Ashish Dixit, CGSC with Abhinav Bansal, Vikramaditya Singh, Tribhuvan, Shubham Sharma, Saurabh Tripathi, Amit Gupta, Ishan Malhotra, Chandan, Deepak Tanwar, G.P. and Shivam Tiwari and Kiritman Singh, appeared for the Respondents. It was argued that the imposition of a service charge in a mandatory manner violated consumer rights and that the camouflaged and coercive manner in which service charge was being collected by restaurants constituted an unfair trade practice under Section 2(47) of the Consumer Protection Act, 2019. The CCPA was of the opinion that consumers should have the autonomy to decide whether or not to pay a gratuity, rather than being compelled to do so through an additional charge in their bills. Read More: Beef Fry, Beef Roast and other Pre-Packaged “Ready to Eat” Food attracts 18% GST: AAR Step by Step Handbook for Filing GST Appeals Click Here The Single Bench of Justice Prathiba M. Singh observed that "the camouflaged and coercive manner in which service charge is imposed misleads consumers and places an undue financial burden upon them." The bench also pointed out that charging GST on service charge resulted in a "double whammy" for customers, further reinforcing the unfair nature of the practice. Read More: Gone Bananas: Pazhampori set to be doused in 18% GST Know How to Prepare Estimation and Viability for Project Reports? Know more Click here In conclusion, the Delhi High Court clarified that while restaurants are free to determine their pricing, any additional charges must be explicitly and voluntarily agreed upon by consumers. The Bench also advised the CCPA to revise the terminology used to permit alternative nomenclatures such as "voluntary contribution," "staff contribution," or "staff welfare fund" to describe such payments, thereby eliminating confusion. While dismissing the writ petitions, the Delhi High Court also slapped costs of ₹1 Lakh each on the Petitioners that are to be deposited with Central Consumer Protection Authority to be utilized for consumer welfare. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates

Service Charge on Restaurant Bills is Not a Mandatory Tax: Delhi HC Directs CCPA To Revise Misleading Terminology [Read Order]

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Service Charge on Restaurant Bills is Not a Mandatory Tax: Delhi HC Directs CCPA To Revise Misleading Terminology [Read Order]

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