By: Arun Raghuram Mahapatra
Central Consumer Protection Authority (hereinafter ‘CCPA’) is the Central Authority that has been established under Section 10 of the Consumer Protection Act, 2019 (‘Act’) to regulate issues about consumer rights violations, unfair trade practices, and other acts that are detrimental to the interests of the consumers. Apart from the power to initiate investigations, file complaints in consumer forums, and undertake research, the CCPA has also been bestowed with the power to issue necessary guidelines for the prevention of unfair trade practices. And recently, one such notice by the CCPA has issued all the hotels and restaurants across the country.
The CCPA, via its notice, dated 4th July 2022, issued various guidelines that barred the addition of service charges in the food bills of restaurants/hotels without the consent of the consumers. The said guidelines were released in response to numerous grievances concerning the hotels/restaurants levying service charges on the bill by default, registered on the National Consumer Helpline.
And as these guidelines shake up the very core of the prevalent service charge regime, it has led to a huge increase. The National Restaurants Association of India even moved to the Delhi high court, where they challenged the legality of the said guidelines. And on 20th July 2022, the Delhi high court stayed the guidelines until the further hearing of the case.
In this article, we shall try to analyze and scrutinize the position of consumer law in the context of service charges and attempt to determine the validity of the CCPA Guidelines. Further, we would try to highlight the existing loopholes in the service charge regime and propose solutions to those problems in a bid to alleviate the system.
Critical Analysis of the Guidelines: Will They Ever See the Light of the Day?
Historically, courts in India have consistently held that restaurants/hotels are entitled to charge above the MRP of packaged consumables and levy service charges on any consumables served therein because of the added hospitality/service factor enjoyed while on these premises. The attributes of such services rendered by these hospitality institutions have undergone judicial inspection and scrutiny since as early as the 1970s and the same has been upheld by the supreme court in the cases of State of Himachal Pradesh v. Associated Hotels of India and Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi. Even in the order delivered by the Delhi high court, where the CCPA Guidelines were put on stay, the learned single judge took note and cognizance of some vital and more recent judgments, such as the Nitin Mittal v. Pind Balluchi Restaurant case and the SS Ahuja v. Pizza Express case, where the validity of the service charge regime was upheld.
As per the position of law on service charges, prima facie, it seems that the CCPA guidelines are unsustainable in the eyes of the law. However, there is more than what meets the eye when we consider the said guidelines and the ground situation.
The rationale provided by CCPA (paragraph 4 of the notice) in introducing the said guidelines is that the component of service is inherent in the price of consumables and that the pricing covers both the goods and services component. Furthermore, restaurants/hotels are free to ask for any prices for the consumables they offer to consumers, and thus charging anything extra than the prices depicted on the menu apart from applicable taxes would constitute unfair trade practices.
In actuality, the CCPA does not deny the levy of service charges as part of product pricing, but what it denies is a service charge on top of the inherent service factor. To clearly understand the concept that CCPA is putting forward, let us take an illustrative example. Let us assume that the price of a bottle of packaged water is Rs.30. A restaurant then depicts the cost of this bottle as Rs.50 on the menu and then during billing charges a 10% service charge, taking the total cost to Rs.55. Here, the CCPA is not against the markup service charge of Rs.20 on the menu but is actually against the second layer of service charge on top of the already hiked price. The CCPA would not be against the restaurant charging Rs.55 on the menu, but what it would be against was the second layer of Rs.5 on top of Rs.50.
While the above exercise seems futile, it does serve a cardinal purpose. If a consumer buys the said bottle for Rs.50 and then additionally pays Rs.5 for the service charge, the said situation may (in the case water is served in a glass or the MRP is scratched off) lead to a consumer thinking that Rs. 50 is the MRP, and he is just paying Rs. 5 for the service factor. In reality, however, the consumer has paid Rs. 25 as the service charge, and he could have bought the bottle at another place with lower service charges. In essence, this practice of a double layer of service charges may lead to a situation of wrong/inaccurate information, wherein the consumer is made to think that he is getting a better deal than he is, which ultimately is against the right to information of a consumer.
However, even this rationale has some inherent issues. The true quantum of service charge, the main contention behind misinformation, can only be defined in the case of consumables having an MRP. This logic fails when applied to prepared drinks or dishes, as these do not have a fixed price tag attached to them, and further, they also have an aspect of skill involved in their preparation which is hard to quantify in terms of money.
Furthermore, the said rationale also does not mesh well with its implementation. If the guidelines in question were to come into force, the second layer of service charge was abolished, and all the menu prices prepared inherently consisting of a service factor, it would lead to an anomalous situation wherein even if an item is for takeaway, it would suffer from in-built service charge. This situation would again be violative of the rights of the consumers as they would have to pay service charges without even enjoying any services.
It is primarily due to these glaring faults in the rationale and the implementation that even though the guidelines mean well and try to remedy a situation of unfair trade practice, they are unlikely to survive the judicial scrutiny in the subsequent hearings.
The Hotel Hello Case: A Possible Remedy to the Misinformation Conundrum
While we can most likely expect the guidelines to be quashed in the subsequent hearings, it does not mean that no solution exists to the ‘misinformation problem’ relating to packaged products.
In the case of Hotel Hello Jeypore Aroma(Multi Cuisine) v. Sri Sunil Kumar Mohanty, the Odisha SCDRC has dealt beautifully with the exact problem of misinformation related to packaged commodities. In the said case, the complainant had ordered a beer, and after the drinks, the waiter handed over a bill charging the final amount as Rs.77/-. The grievance of the complainant was that the actual MRP of said beer was Rs.62/-, but the Hotel had taken Rs.15/- extra for the beer. While relying on the judicial precedents and the settled legal position, the Commission rightly held that the Hotel was entitled to charge above the MRP, but it also provided a completely new dimension to the right to information under the Act and the aspect of service charges.
The Commission held that the right to be informed of the price of goods/services under the Act did not only mean the right to know the final prices but included the right to know the price breakdown of said goods/services. Extending this reasoning to the Hotel’s bill, it held that it was the right of the consumer to be informed about the quantum of service charge levied on a packaged commodity.
The Commission finally held that the failure to describe between MRP and services charges of the product constituted unfair trade practices under the Act and directed the Hotel to stop such practice and pay the necessary compensation.
To be precise, while the Commission held that hotels/restaurants could charge above the MRP of a product, the quantum of the service charges/markup so levied had to be furnished on the menu and had to be also outlined on the bill under separate heads .
Drawing inspiration from the said judgment, the CCPA could perhaps tackle the problem of double-layer service charges by adopting the following suggestions: –
- Depiction of only MRP prices of packaged products on hotel/restaurant menu cards should be made mandatory. Then the exact quantum of service charge, either in percentage or in terms of markup price, should be displayed beside the MRP. This process would allow the consumer to see how much the price has been effectively hiked and then decide whether they want to continue with the transaction or not.
- The total quantum of service charges levied on the complete transaction should be categorically stated in every bill. This step would allow the consumer to compare the quantum of service charges levied on one premise with that of other premises and will lead to better decisions.
- In the case of packaged products that have an MRP, no GST nor any other tax should be levied. Further, in the case of non-packaged products and dishes, both the service charge and GST should be calculated on the base price mentioned on the menu.
Conclusively, we can say that the said guidelines, although mean well, suffer from various defects that make them unsustainable in law. The CCPA Guidelines need major reworking to be beneficial for the consumers while being fair to the hospitality institutions. If the above suggestions were implemented, it would definitely lead to a change for the better in the consumer law landscape. Further, it is also recommended that a law/amendment is passed by the Legislature with the said rules rather than just CCPA guidelines, as these guidelines are prone to various legal challenges. Otherwise, inserting the words “these guidelines have the force of law.” in Section 18(l) of the Act would also be a possible remedy.
Consumer law is at a very nascent stage, despite the first Act coming over 30 years ago, and needs more attention from both the government and the legal fraternity. Even if the rules are framed, if awareness about the same is lacking, they will remain infructuous. Hence, awareness of the consumers is the soul of the consumer law, and we require more steps in this regard as well.
(Arun Raghuram Mahapatra is a second-year law student from Rajiv Gandhi National University of Law, Punjab. He may be contacted via mail at [email protected]).
Cite as: Arun Raghuram Mahapatra‘CCPA Service Charge Guidelines: The Need for Refurbishment’ (The Rmlnlu Law Review Blog10 October 2022)