Tipping the Balance: An Analysis of Delhi High Court’s Ban on Mandatory Service Charges in Restaurants

Introduction

Imagine being presented with a pre-filled donation slip the moment you walk into a store. You did not ask for it, you were not told you could refuse it, but it is already part of your bill. For years, diners in India faced a similar scenario in restaurants, where a mandatory “service charge” was added into bills, ostensibly as a tip for staff. In the landmark judgment¹, this practice has been struck down by the Delhi High Court (Court), upholding the Guidelines² (Guidelines) issued by the Central Consumer Protection Authority (CCPA) that, inter alia, prohibit restaurants from levying compulsory service charges on bills. In National Restaurant Assn. of India v. Union of India,³, the Court dismissed the petitions filed by restaurant associations and ruled that adding a mandatory service charge to a customer’s bill is an unfair trade practice under the ⁴ (CPA, 2019). The Court made it clear that any “service charge or tip” is voluntary, not to be imposed by default, and that forcing such charges onto consumers violates their rights and interests. Restaurants can suggest or request tips, but they cannot compel payment of a fixed service fee over and above the price charge for service of food and beverages. This decision tips the balance in favour of consumer rights, while prompting the hospitality industry to revisit how it compensates staff without passing an “additional financial burden” onto patrons without consent.

From complaints to guidelines: Background of the dispute

Widespread consumer grievances about “mandatory service charges” in hotel and restaurant bills led the CCPA to issue the Guidelines in July 2022. These Guidelines, framed under the CCPA’s powers under the CPA, 2019⁵, inter alia, directed that no hotel or restaurant shall add a service charge automatically or by default to the bill, and that any payment towards service charge must be at the consumer’s discretion. The rationale was that many consumers felt coerced into paying these charges, which were often presented as a fait accompli on the bill, sometimes even under the guise of a government levy. The CCPA received numerous complaints that such practices misled customers about the true price of their meals and effectively left them with no choice but to pay extra.

The restaurant industry, however, viewed the Guidelines as an overreach. The National Restaurant Association of India (NRAI) and the Federation of Hotel and Restaurant Associations of India (FHRAI) challenged these Guidelines before the Court on the ground that service charges had long been a standard practice in hospitality. By their account, diners always retained the option to dine elsewhere if they objected to a service charge, and many customers willingly paid it in appreciation of service. The petitioners contended that the Guidelines lacked legal force and impinged on their business rights, since no law outright prohibited the levy of service charges. Petitioners obtained an interim stay in 2022, allowing restaurants to continue the practice during the pendency of the case. The stage was thus set for an examination of whether mandatory service charges amount to an “unfair trade practice” under the CPA, 2019, and whether regulators can curb such practices in the interest of consumers.

Unfair trade practice: Service charge under consumer law

A central issue before the Court was whether automatically adding a service charge to every bill, irrespective of service quality or customer consent, is an unfair or restrictive trade practice under the CPA, 2019. The CPA, 2019 defines an “unfair trade practice”⁶ as a trade practice which, for promoting the sale or use of goods or services, adopts unfair methods or deceptive practices (including misrepresenting the price of a product). It also defines an “unfair contract” as a contract that causes significant change in consumer rights, including terms that impose unreasonable charges or obligations on a consumer.⁷ The CCPA, as per Chapter V of the CPA, 2019, is empowered to prevent unfair trade practices and protect consumer interests. In particular, Section 18(2)(l) of the CPA, 2019 authorises the CCPA to issue guidelines to prevent unfair trade practices and ensure that consumer rights are not undermined by predatory market behaviour.

Applying these provisions, inter alia, the Court found that the practice of levying a compulsory service charge falls squarely within the ambit of unfair trade practices. When a restaurant advertises food items at a certain price but later charges an additional 10% (or more) as service charge, it “materially misleads the consumer” about the price to be paid. The customer is lured in by one price but ultimately must pay a higher amount, which is inherently deceptive. The Court noted that a consumer often has no real bargaining power in this scenario as once the meal has been consumed, a printed service charge on the bill operates as a condition the consumer is forced to comply with. Such a condition, not explicitly negotiated or agreed to at the time of placing the order, was deemed an “unfair contract” term as it imposed an unreasonable charge after the fact. The Court observed that a diner’s choice to pay a tip must be a conscious, voluntary decision reflecting satisfaction with service; making it an automatic levy robs the consumer of any real choice. By bundling a tip as a compulsory fee, restaurants were effectively distorting the “price” of the service and subverting the very concept of a tip or gratuity (which, by definition, is discretionary).

The Court endorsed the CCPA’s stance that this practice amounts to an unfair method of competition and trade. It upheld the Guidelines as a valid exercise of the CCPA’s power to regulate unfair practices in consumer transactions. In doing so, the Court rejected the submissions that these Guidelines were mere “advisories” which did not have the force of law. Instead, it affirmed that they are directions issued under the powers conferred by a statute,⁸ and, therefore, have the force of law.⁹ It further went on hold that the power to issue guidelines is an essential function of the CCPA.¹⁰

Business freedom versus consumer rights: Arguments under Article 19(1)(g)

Petitioners had argued that discontinuance of service charge would infringe their fundamental rights to do business under Article 19(1)(g) of the Constitution.¹¹ They asserted that restaurants, as part of their freedom of trade, have the liberty to set the terms and pricing of the services they provide. If a restaurant transparently informs customers (through menu notices or signage) that a certain percentage will be added as service charge, that term becomes part of an implied contract with the customer. Prohibiting them from levying such a charge, they argued, was an arbitrary restriction on their ability to devise a business model and pricing structure. In essence, the petitioners viewed the service charge as a component of the price, merely split out for transparency, and not as an overreach or deception. Thus, according to them, the CCPA Guidelines intruded on their autonomy to conduct business and price their services freely.

The Court addressed this contention by relying on Article 19(6) of the Constitution of India, which define reasonable restrictions. The freedom to practice any profession or carry on trade is not absolute; the State can regulate it in the interest of the general public. The Court held that in National Restaurant Assn. of India case¹², the restriction on adding automatic service charges is indeed a reasonable one, aimed at protecting consumers from an unfair imposition. Crucially, National Restaurant Assn. of India case¹³ drew a distinction between the freedom to determine prices for one’s goods or services and the practice of springing an add-on charge on consumers. Restaurants remain free to fix the price of their menu items as they see fit, which is a core aspect of business liberty that is untouched. What the Guidelines curb is the practice of imposing an additional charge that the consumer had no choice in negotiating and often no knowledge of it being levied. The Court observed that a restaurant’s right under Article 19(1)(g) would genuinely be curtailed only if the law prevented it from setting its own menu prices in the first place. Here, the establishments were not barred from pricing their food to factor in service costs; they could incorporate any extra amount needed for staff remuneration into the listed prices of dishes.

By emphasising consumer interest as a facet of “general public interest” the Court found the Guidelines to be a proportionate measure. It cited the Latin maxim salus populi suprema lex, which means “the welfare of the people is the supreme law” to highlight that the business interest of restaurants cannot trump the rights of consumers as a class. National Restaurant Assn. of India case¹⁴ noted that diners often feel compelled to pay the service charge even if they were unhappy with the service, since it appears as a mandatory fee. This undermines the principle of fair trade and the consumer’s right to receive goods and services at agreed-upon prices. In balancing the equities, the Court concluded that consumer protection and transparency outweigh any nominal inconvenience to businesses. Thus, Article 19(1)(g) could not be a shield for what is essentially an unfair trade practice.

Service charge and employee welfare: No legal justification

Petitioners’ case was also hinged on the submission that service charges ultimately benefit the staff, thus prohibiting them would hurt welfare of the employees. They claimed that the amounts collected as service charge are pooled and distributed among waiters, kitchen staff and other employees, often forming a significant part of their earnings. Removing this mechanism, they argued, could lead to pay cuts or loss of income for these workers, impinging on their right to livelihood.¹⁵

The Court, however, was not persuaded by their argument, primarily because it found no evidence that the practice of mandatory service charge was a result of any negotiated settlement or legal obligation towards employees. If restaurants truly intended these charges as bona fide gratuities for staff, nothing stopped them from distributing voluntary tips or even raising staff salaries funded through slightly higher food prices. The Court noted that consumer rights cannot be subjugated to private arrangements made by businesses. While fair wages and employee benefits are certainly important social objectives, they cannot be achieved by foisting involuntary charges on consumers. National Restaurant Assn. of India case¹⁶ noted that no law or contract had been produced by the petitioners to show that they were legally bound to impose a service charge for the benefit of employees. In the absence of any statutory or binding contract obligation, the service charge appeared to be a self-imposed practice, conveniently justified ex post facto as a worker welfare measure.

Global practices: How tipping and service charges are handled abroad

The petitioner had also contended that levying a service charge is a globally accepted practice, implying that the India was out of step with international norms. The Court dispelled this notion by surveying how various jurisdictions handle tips and service fees, revealing that the trend worldwide is towards protecting consumers choice and ensuring transparency, often alongside safeguards for workers. The “mandatory” service charge model that Indian restaurants were defending is by no means a universal standard. In fact, many countries either strictly regulate such charges or discourage them altogether.

In the United Kingdom, tips and service charges are generally understood to be at the customer’s discretion, and recent legal reforms have reinforced this. In 2023, the UK enacted the Employment (Allocation of Tips) Act, 2023¹⁷, which prohibits employers from withholding tips or service charges paid by customers. Under this new law, hundred per cent (100%) of any tip or service charge must go to the staff, and businesses are barred from skimming any portion for themselves.¹⁸ The reform came about because some UK restaurants were found taking a cut from the service charge or using it to meet business expenses, much to public outrage. Now, British diners can be confident that if they do pay a service charge, it is not obligatory and it legally belongs to the employees who served them. Crucially, even with the law, paying the service charge remains voluntary, customers can ask for it to be removed if they were dissatisfied with service.

In the United States, the culture of tipping is deeply ingrained, but it is almost entirely a voluntary reward system. No federal law mandates customers to tip, and traditionally prices on US menus do not include service charges. Thus, if a restaurant adds, say, a mandatory 18% service charge (some do this for large tables or special events), that charge is considered part of the business’s revenue, and in some jurisdictions, it must be taxed and treated as wages if distributed to staff. The practical upshot in the US is that while tipping is encouraged socially (and often expected at 15%-20% for good service), the customer retains the ultimate choice. Restaurants cannot force a tip; at most, they can suggest guidelines or automatically add a line for convenience, which the patron may adjust or remove. The Court’s stance aligns with this philosophy that a gratuity must be gratuitous, not extracted.

Some European countries have long abolished the practice of tacking mandatory charges on bills, by simply including service in their pricing structure. In France, for instance, it is a legal requirement that all restaurant prices are service compris, meaning a service charge (usually around 15%) is already built into the menu prices.¹⁹ As a result, French customers are not confronted with a surprise fee at the end of a meal. Any tipping beyond the bill total is purely optional.

In Switzerland, the law has, for decades,²⁰ required that service charges be included in published prices at restaurants.²¹ Consequently, bills do not have a separate service charge competent as the price of the meal already accounts for the service, and any tip is purely at the discretion of the consumer.

Therefore, a limited international survey is reflective of a common ethos revolving around transparency and voluntariness. Where service charges exist (UK), they must be transparent and by regulation be apportioned for staff welfare. Where service charge is not mandatory, tipping and gratuity remains voluntary and many nations prefer embedding service costs into prices to avoid any confusion (Europe, Australia, etc.).

Factoring a global perspective, the Court re-emphasised that whilst there is no bar on fixing prices for items on the menu, which may even include a component of service charge, the said charge could not be unilaterally imposed on the culmination of the dining experience. In the absence of a dedicated regulation governing apportionment of service charge/staff welfare fund, it cannot be construed that the money collected through service charge would necessarily be utilised for staff welfare.

Conclusion: Consumer welfare and the road ahead

The Court’s decision marks a significant victory for consumer rights in India’s hospitality sector. National Restaurant Assn. of India case²² upholds both the letter and spirit of consumer protection jurisprudence in India; the essence whereof is to prevent unfair trade practices that harm consumers as a class. The Court has expounded on the powers of the CCPA as both the regulator as well as the enforcer of consumer rights in India. Therefore, as a consequence of National Restaurant Assn. of India case²³, consumers, who are faced an imposition of service charge, would have a robust legal recourse against the said practice.

That being said, National Restaurant Assn. of India case²⁴ does bring to light the issue of employee/staff/worker welfare employed in the hospitality and food & beverage (F&B) sector in India. National Restaurant Assn. of India case²⁵, while attempting to balance equities between consumer rights and employee welfare, did so in the absence of any employee association or trade union, espousing their cause and concern. It is not without good reason (and law) that the Court has ruled in favour of the consumers as a class. One cannot predict as to what the outcome could have been if the employee associations/unions would have had an audience in these proceedings. In the absence of any dedicated regulations, perhaps the balance would still have tipped in favour of the consumers.

The hospitality and F&B sector in India employ a huge amount of workforce, many of whom are engaged in an ad hoc manner, on a minimum wage basis. Given the fact that the restaurant industry is mostly informal, there are no mandatory provisions for social security, insurance, and other means of staff welfare. Very often, it is seen that the staff/waiters at restaurants rely heavily on the gratuity/tips offered by the customers as a means of sustenance, which, in turn, incentivises them to render better services.

As per the existing regulations applicable in India, National Restaurant Assn. of India case²⁶ is surely a step in the right direction. However, it also serves as a wake-up call for our lawmakers to bring about appropriate guidelines and regulations aimed at welfare of the staff and workers employed in the sector.

“Tipping the balance” ought not be a question between a consumer and a business owner but one which brings about fairness and equilibrium between the interest of the consumer vis-à-vis that of the workers.