IN THE HIGH COURT OF DELHI AT NEW DELHI WP(C)6517/03 & WP(C) Nos.14691-16927/05 THE FEDERATION OF HOTELS & ....Petitioner RESTAURANTS ASSOCIATION OF INDIA & ORS. through Mr. Lalit Bhasin with Ms. Bhavna Kohli, Mr. Mudit Sharma & Mr. Abhishek Dimri, Advs. Versus UNION OF INDIA & ORS. ...Respondent through Mr. Jayant Nath, Sr. Adv. with Mr. R.K. Jha, Adv. for UOI Mr. Sandeep Gupta, Adv. for Respondent No.2 WITH WP(C) No.9528/03 & WP(C) Nos.13775-14072/2005 NATIONAL RESTAURANT .... Petitioner ASSOCIATION OF INDIA through Mr. Anip Sachthey with Mr. Sanjeev Rajpal & Mr. Mohit Paul, Advs. Versus UNION OF INDIA & ORS. .... Respondent through Mr. Jayant Nath, Sr. Adv. with Mr. R.K. Jha, Adv. for UOI Mr. J.R. Midha with Mr. Maneesh K. Shukla, Advs. for Respondent No.2 Date of Hearing : January 17, 2007 Date of Decision : March 05, 2007 CW 6517/2003 Page 1 of 26 CORAM: HON'BLE MR. JUSTICE VIKRAMAJIT SEN 1. Whether reporters of local papers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? J U D G M E N T 1. The question that arises in these petitions is whether it is impermissible for the Petitioners to charge their customers/guests the any price above the maximum retail price (MRP) mentioned on mineral-water packaged and bottled by third parties. This conundrum is common both to hotels and restaurants. The character and nature of the service provided by hotels has already received jural scrutiny in State of H.P. -vs- Associated Hotels of India, AIR 1972 SC 1131 [also reported as The State of Punjab -vs- Associated Hotels of India Ltd, (1972) 1 SCC 472 : (1972) 2 SCR 937]. The Constitution Bench of the Supreme Court made the following enunciation of the law which in my view conclude the debate and is better extracted than paraphrased by us:- 13. What precisely then is the nature of the transaction and the intention of the parties when a hotelier receives a guest in his hotel? Is there in that transaction an CW 6517/2003 Page 2 of 26 intention to sell him food contained in the meals served to him during his stay in the hotel? It stands to reason that during such stay a well equipped hotel would have to furnish a number of amenities to render the customer's stay comfortable. In the supply of such amenities do the hotelier and his customer enter into several contracts every time an amenity is furnished? When a traveller, by plane or by steam-ship, purchases his passage-ticket, the transaction is one for his passage from one place to another. If, in the course of carrying out that transaction, the traveller is supplied with drinks or meals or cigarettes, no one would think that the transaction involves separate sales each time any of those things is supplied. The transaction is essentially one of carrying the passenger to his destination and if in performance of the contract of carriage something is supplied to him, such supply is only incidental to that service, no changing either the pattern or the nature of the contract. Similarly, when clothes are given for washing to a laundry, there is a transaction which essentially involves work or service, and if the laundryman stitches a button to a garment which has fallen off, there is no sale of the button or the thread. A number of such cases involving incidental uses of materials can be cited, none of which can be said to involve a sale as part of the main transaction. 14. The transaction in question is essentially one and indivisible, namely, one of receiving a customer in the hotel to stay. Even if the transaction is to be CW 6517/2003 Page 3 of 26 disintegrated, there is no question of the supply of meals during such stay constituting a separate contract of sale, since no intention on the part of the parties to sell and purchase food stuff supplied during meal times can be realistically spelt out. No doubt, the customer, during his stay, consumes a number of food stuffs. It may be possible to say that the property in those food stuffs passes from the hotelier to the customer at least to the extent of the food stuffs consumed by him. Even if that be so, mere transfer of property, as aforesaid, is not conclusive and does not render the event of such supply and consumption a sale, since there is no intention to sell and purchase. The transaction essentially is one of service by the hotelier in the performance of which meals are served as part of and incidental to that service, such amenities being regarded as essential in all well conducted modern hotels. The bill prepared by the hotelier is one and indivisible, not being capable by approximation of being split up into one for residence and the other for meals. No doubt, such a bill would be prepared after consideration of the costs of meals, but that would be so for all the other amenities given to the customer. For example, when the customer uses a fan in the room allotted to him, there is surely no sale of electricity, nor a hire of the fan. Such amenities, including that of meals, are part and parcel of service which is in reality the transaction between the parties. 15. Even in the case of restaurants and other such places where customers go to be served with food and CW 6517/2003 Page 4 of 26 drink for immediate consumption at the premises, two conflicting views appear to prevail in the American courts. According to one view, an implied warranty of wholesomeness and fitness for human consumption arises in the case of food served by a public eating place. The transaction, in this view, constitutes a sale within the rules giving rise to such a warranty. The nature of the contract in the sale of food by a restaurant to customers implies a reliance, it is said, on the skill and judgment of the restaurant-keeper to furnish food fit for human consumption. The other view is that such an implied warranty does not arise in such transactions. This view is based on the theory that the transaction does not constitute a sale inasmuch as the proprietor of an eating place does not sell but “utters” provisions, and that it is the service that is predominant, the passing of title being merely incidental (Corpus Juris Secundum, Vol. 77, 1215-1216). The two conflicting views present a choice between liability arising from a contract of implied warranty and for negligence in tort, a choice indicative of a conflict, in the words of Dean Pound, between social interest in the safety of an individual and the individual interest of the supplier of food. The principle accepted in cases where warranty has been spelt out was that even though the transaction is not a sale, the basis for an implied warranty is the justifiable reliance on the judgment or skill of the warrantor and that a sale is not the only transaction in which such a warranty can be implied. The relationship between the CW 6517/2003 Page 5 of 26 dispenser of food and one who consumes it on the premises is one of contractual relationship, a relationship of such a nature that an implied warranty of wholesomeness reflects the reality of the transaction involved and an express obligation understood by the parties in the sense that the customer does, in fact, rely upon such dispenser of food for more than the use of due care. (See Cushing v. Rodman, 104 American L.R. 1023 = 62 F.R. 2nd Srs. 864, 868). A representative case propounding the opposite view is the case of P.W. Woolworth Co. v. Wilson, 74 F.R. 2nd Srs. 439 citing Nisky v. Childs Co. 103 N.J. Law 464 wherein the principle accepted was that such cases involved no sales but only service and that the dispenser of food, such as a restaurant or a drug store keeper serving food for consumption at the premises did not sell and warrant food but uttered and served it and was liable in negligence, the rule in such cases being caveat emptor. 16. In England, a hotel under the Hotel Proprietors Act, 1956 is an establishment held out by the proprietor as offering food, drink, and if so, required, sleeping accommodation, without special contract, to any traveller presenting himself and who appears able and willing to pay a reasonable sum for the services and facilities provided. This definition, which is also the definition of an inn, still excludes, as formerly, boarding houses, lodging houses and public houses which are merely alehouses and in none of which there is the obligation to receive and entertain guests. An CW 6517/2003 Page 6 of 26 innkeeper, that is to say, in the present days a hotel proprietor, in his capacity as an innkeeper is, on the other hand, bound by the common law or the custom of the realm to receive and lodge in his inn all comers who are travellers and to entertain them at reasonable prices without any special or previous contract unless he has some reasonable ground of refusal. (Halsbury's Laws of England, 3rd Ed., Vol. 21, 445-446). The rights and obligations of hotel proprietors are governed by statute which has more or less incorporated the common law. The contract between such a hotel proprietor and a traveller presenting himself to him for lodging is one which is essentially a contract of service and facilities provided at reasonable price. 17. The transaction between a hotelier and a visitor to his hotel is thus one essentially of service in the performance of which and as part of the amenities incidental to that service, the hotelier serves meals at stated hours. The Revenue, therefore, was not entitled to split up the transaction into two parts, one of service and the other of sale of food stuffs and to split up also the bill charged by the hotelier as consisting of charges for lodging and charges for food stuffs served to him with a view to bring the latter under the Act. 2. In Northern India Caterers (India) Ltd. -vs- Lt. Governor of Delhi, [1979] 1 SCR 557 the Bench comprising their Lordships P.N. Bhagwati, V.D. Tulzapurkar and R.S. Pathak, JJ. CW 6517/2003 Page 7 of 26 extended the above ratio even to restaurants, in these words:- Like the hotelier, a restaurateur provides many services, in addition to the supply of food. He provides furniture and furnishings, linen, crockery and cutlery, and in the eating places of today he may add music and a specially provided area for floor dancing and in some cases a floor show. The view taken by the English law found acceptance on American soil, and after some desultroy dissent initially in certain states it very soon became firmly established as the general view of the law. The first edition of American Jurisprudence sets forth the statement of the law in that regard, but we may go to the case itself, Electa B. Merrill v. James W. Hodson, from which the statement has been derived. Holding that the supply of food or drink to customers did not partake of the character of a sale of goods, the Court commented:- The essence of it is not an agreement for the transfer of the general property of the food or drink placed at the command of the customer for the satisfaction of his desires, or actually appropriated by him in the process of appeasing his appetite or thirst. The customer does not become the owner of the food set before him, or of that portion which is cared for his use, or of that which finds a place upon his plate, or in side dishes set about it. No designated portion becomes his. He is privileged to eat, and that is all. The uneaten food is not his. He cannot do what he pleases with it. That which is set before him or placed at his command is provided to enable him to satisfy his CW 6517/2003 Page 8 of 26 immediate wants, and for no other purpose. He may satisfy those wants; but there he must stop. He may not turn over unconsumed portions to others at his pleasure, or carry away such portions. The true essence of the transaction is service in the satisfaction of a human need or desire – ministry to a bodily want. A necessary incident of this service or ministry is the consumption of the food required. This consumption involves destruction, and nothing remains of what is consumed to which the right of property can be said to attach. Before consumption title does not pass; after consumption there remains nothings to become the subject of title. What the customer pays for is a right to satisfy his appetite by the process of destruction. What he thus pays for includes more than the price of the food as such. It includes all that enters into the conception of service, and with it no small factor of direct personal service. It does not contemplate the transfer of the general property in the food supplied as a factor in the service rendered. 3. This very question again came up for the consideration of the Constitution Bench in K. Damodarasamy Naidu & Bros. -vs- State of T.N., (2000) 1 SCC 521 and the following extract thereof is instructively topical:- 4. A review petition was filed in respect of the judgment in Northern India Caterers and all three Judges found CW 6517/2003 Page 9 of 26 that it should be dismissed. The order of the majority noted that it appeared from the submissions that were made in the review petition that the States were apprehensive that the judgment in Northern India Caterers would be invoked by restaurant-owners in those cases also where there was sale of food and title passed to the customers. It seemed to the two learned Judges who constituted the majority, having regard to the facts on which that judgment rested, undisputed as they had remained throughout the different stages of the litigation, and the considerations which they attracted, that no such apprehension could reasonably be entertained. Where food was supplied in a restaurant and it was established upon the facts that the substance of the transaction, evidenced by its dominant, object, was the sale of food and the rendering of service was merely incidental, the transaction would undoubtedly be exigible to sales tax. In every case it would be for the taxing authority to ascertain the facts when making an assessment under the relevant sales tax law and to determine upon those facts whether a sale of the food supplied was intended. Krishna Iyer, J., concurring with the majority, said that the judgment under review squarely applied to the cases of high-style restaurants or residential hotels which rendered a bundle of special services for a consolidated sum. CW 6517/2003 Page 10 of 26 4. The first two decisions partly prompted the Constitution Forty-sixth Amendment Act, 1982 which inter alia amended Article 366 of the Constitution by inserting clause (29-A) therein. By a deeming fiction the supply, by way of or as part of any service or in any other manner whatsoever of goods being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, was subject to tax on the sale of the purchase of goods. This analysis inexorably leads to the conclusion that consumption of articles of food or drink in hotels and restaurants do not constitute a sale, otherwise the constitutional amendment would not have been necessitated. The contention of Mr. Lalit Bhasin, learned counsel for the Hotels, that the supply of food-stuff and drinks in hotels and restaurants are not in the nature of sale is, therefore, irresistible and unquestionable. Therefore, what calls for consideration is whether there is any other regime established by statute which governs or restricts the prices that can be charged for food-stuffs and drinks supplied to customers in hotels or restaurants. According to learned counsel for the Respondent this regime has been established CW 6517/2003 Page 11 of 26 by The Standards of Weights and Measures Act, 1976 and the Rules framed thereunder( SWM Act in brief). 5. The Gazette of India, Ext., Pt.II, S.1, dated 8.4.1976 contains a concise statement of the Objects and Reasons of the SWM Act. It recounts that India is a signatory to the Metre Convention in the context of which unanimous recommendation came to be made suggesting the replacement of the Standards of Weights and Measures Act, 1956 by a more comprehensive legislation on the subject. The intendment of the Bill was to provide for consumer protection in respect of packaged commodities by providing for the proper indication on the package of net quantity by weight, measures or number, the identity of the commodity contained therein, name of the manufacturer as well as the price of the package. The Preamble to the SWM Act is “to establish standards of weights and measures, to regulate inter-State trade or commerce in weights, measures and the other goods which are sold or distributed by weight, measure or number. ......”. In terms of Section 2(v) “sale” means - ”the transfer of property in any weight, measure or other goods by one person to another for cash or for deferred payment or for any other valuable consideration”. It seems to me CW 6517/2003 Page 12 of 26 that a perusal of the Objects and Reasons of the Bill and the Preamble of the Act cannot but lead to the conclusion that the SWM Act is concerned only with the packaging of articles, as much as the size, number, weight and even the recommended price is required to be clearly stated. As has already been pointed out the Legislature could have borrowed the definition contained in clause 29-A of Article 366 of the Constitution, but has not considered it expedient to do so. 6. This is also evident on a reading of Section 39 of the SWM Act, which is the fasciculous dealing with commodities in packaged form intended to be sold or distributed in the course of inter-state trade or commerce. It prohibits a person to make, manufacture, pack, sell, or cause to be packed or sold; or to distribute, deliver, or cause to be distributed or delivered; or to offer, expose or possess for sale any commodity in packaged form unless such package bears thereon a definite, plain and conspicuous declaration (i) of the identity of the commodity, (ii) the net quantity, (iii) accurate number, (iv) unit sale price, (v) sale price of the commodity. This Section does not permit any person to sell, distribute or deliver for sale a package containing a commodity which is filled less than the prescribed capacity of CW 6517/2003 Page 13 of 26 such package. Mr. Bhasin was at pains to point out that no prohibition has been imposed by the statute to sell any commodity in excess of the price stated on its package. 7. Section 83 of the SWM Act empowers the Central Government to 'make rules for carrying out the provision' of the Act. In exercise of these powers the Central Government has promulgated “The Standards of Weights and Measures (Packaged Commodities) Rules, 1977 [ hereinafter referred to SWM Rules]”. Mr. Jayant Nath, learned Senior Counsel for the Union of India and Mr. Midha, learned Standing Counsel for the Government of NCT of Delhi, have drawn attention to sundry definitions contained in the SWM Rules and to Rule 23, all of which are reproduced for ease of reference:- 2 (d)“dealer”, in relation to any commodity in packaged form, means a person who, or a firm or a Hindu undivided family which, carries on directly or otherwise, the business of buying, selling, supplying or distributing any such commodity, whether for cash or for deferred payment or for commission, remuneration or other valuable consideration, and includes a commission agent who carries on such business on behalf of any principal, but does not include a manufacturer who manufactures any commodity which is sold or distributed in a packaged form except where such commodity is sold by CW 6517/2003 Page 14 of 26 such manufacturer to any other person other than a dealer. 2 (o) “retail dealer”, in relation to any commodity in packaged form, means a dealer who directly sells such packages to the consumer and includes, in relation to such packages as are sold directly to the consumer, a wholesale dealer who makes such direct sale. 2 (q) “retail sale”, in relation to a commodity, means the sale, distribution or delivery of such commodity through retail sales agencies or other instrumentalities for consumption by an individual or a group of individuals or any other consumer. 2(r) “retail sale price” means the maximum price at which the commodity in packaged form may be sold to the ultimate consumer and where such price is mentioned on the package, there shall be printed on the packages the words[Maximum or Max. retail price].... inclusive of all taxes [or in the form MRP Rs..... inclusive of all taxes.]] Explanation.--For the purpose of this clause “maximum price” in relation to any commodity in packaged form shall include all taxes local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing forwarding and the like, as the case may be] 2 (w) “wholesale dealer”, in relation to any commodity in packaged form, means a dealer who does not directly sell such commodity to any consumer but distributes or sells such commodity through one or more intermediaries. CW 6517/2003 Page 15 of 26 Explanation.--Nothing in this clause shall be construed as preventing a wholesale dealer from functioning as a retail dealer in relation to any commodity, but where he functions in relation to any commodity as a retail dealer, he shall comply with all the provisions of these rules which a retail dealer is required by these rules to comply. 23. Provisions relating to whole sale dealer and retail dealers.--(1) No whole sale dealer or retail dealer shall sell, distribute, deliver, display or store for sale any commodity in the packaged form unless the package complies with, in all respects, the provisions of the Act and these rules. (2) No retail dealer or other person including manufacturer, packer and wholesale dealer shall make any sale of any commodity in packaged form at a price exceeding the retail sale price thereof.] Explanation.--For the removal of doubts, it is hereby declared that a sale, distribution or delivery by a wholesale dealer to a retail dealer or other person is a “retail sale” within the meaning of this sub-rule.] (4) Where, after any commodity has been pre-packed for sale, any tax payable in relation to such commodity is revised, the retail dealer or any other person shall not make any retail sale of such commodity at a price exceeding the revised retail sale price, communicated to him by the manufacturer, or where the manufacturer is not the packer, the packer and it shall be the duty of the manufacturer or packer, as the case may be, to indicate CW 6517/2003 Page 16 of 26 by not less than two advertisements in one or more newspapers and also by circulation of notices to the dealers and to the Director in the Central Government and Controllers of Legal Metrology in the States and Union Territories, the revised prices of such packages but the difference between the price marked on the package and the revised price shall not, in any case, be higher than the extent of increase in the tax or in the case of imposition of fresh tax higher than the fresh tax so imposed: Provided that publication in any newspaper,