FHRAI, NRAI React Strongly to Press Note on Service Charge

THE RECENT press note issued on January 2, 2017 by the Ministry of Consumer Affairs, Food and Public Distribution, in which the Ministry stated that customers dissatisfied with service at any hotel or restaurant could have the service charge element of their bills waived, has understandably brought about strong reaction from the hotel and restaurant industry.

The reaction of Riyaaz Amlani, President of the National Restaurant Association of India (NRAI), has been widely reported and states that the decision will affect around 8.5 million employees associated with the food service industry, including “everyone from the owner to the dishwasher, the caretaker, and the toilet cleaner.”

“It is a matter of policy for a restaurant to decide if service charge is to be levied or not. Information regarding amount of service charge is to be clearly mentioned by restaurants on their menu cards or otherwise also displayed, so that customers are well aware of this charge before availing the services and can use their discretion of not using the facility offered by the restaurant,” Amlani told the IANS news agency.

The Federation of Hotel and Restaurant Associations of India (FHRAI) also issued a press note on the service charge issue, which states the following:
Service charge, colloquially known as “tip”, is the amount paid to the staff of, the restaurant or other similar establishment.

In some instances, the establishment may choose to include this amount in the bill itself, and the percentage may vary from 5% to 15% of the value billed.
This is a common and accepted practice in India as well as several other countries. This practice has already been specifically upheld by the highest consumer forum of the country, i.e. National Consumer Disputes Redressal Commission, New Delhi in Nitin Mittal vs. Pind Baluchi, (2012) NCDRC 444. Thus, the Association has been advised that such a practice is not an “unfair trade practice” within the Consumer Protection Act. It is neither unfair, nor deceptive, and nor is it meant to promote sale, use or supply or any goods; nor provision of any service. It is merely a nominal charge – a fraction of the total bill – charged for the benefit of the staff of the establishment, and is clearly disclosed under a separate heading in the bill which specifies, the amount, the % rate at which it has been calculated and the fact that it is a “service charge” and not a tax.

Further this practice of including “service charge” in the bill has also been specifically acknowledged by the Hon’ble Supreme Court way back in 1976 in Rambagh Palace Hotel vs. Hotel Workers’ Union (1976) 4 SCC 817, as well as more recently on 3.12.2007 in the case of Quality Inn Souther Star vs. Regional Director, ESI (C.A. No. 1250/2001). This practice has also been noted by the Hon’ble Delhi High Court [Income Tax vs. ITC Ltd., (2011) 338 ITR 598] and the Income Tax Appellate Tribunal [Rajinder kumar Jain vs. ACIT, New Delhi, Order dt. 24.2.2015 in ITA Nos. 328-329. Del./2013] in the context of the Income Tax Act, 1961.

Service Charge is not a government levy, and is not to be confused with VAT or service tax. It is an amount meant for the staff of the establishment, which in some cases, may be charged in the bill itself. It is a charge like any other, and it is up to the establishment to decide whether and how much to charge in the bill. It is an additional earning for the staff of the establishment, apart from their regular salary.

Establishments are advised by the Association to clearly mention on their menu cards, or in any other prominent place, in case they are following the practice of including service charge in the bill. In this view of the matter, the Association believes that the Press Note issue does not lay down the correct position in law.