In a recent decision by the Supreme Court of India in Federation of Hotel and Restaurant Associations of India vs Union of India, the apex court has permitted hotels and restaurants to charge prices higher than the Maximum Retail Price (MRP) on bottled water sold to customers as part of food and drinks service.

The decision deals with the applicability of the Legal Metrology Act, 2009 and the Packaged Commodity Rules, 2011 (“New Laws”), which replaced the Standards of Weights and Measures Act, 1976 and the Standards of Weights and Measures (Packaged Commodities) Rules, 1977 (“Prior Laws”).

Previous history

The decision arises out of appeals to a 2007 order by a single judge bench of the High Court of Delhi, which held that charging prices for mineral water above the MRP printed on the packaging during the service of the customers in hotels and restaurants does not violate the provisions of the Prior Laws, as it does not constitute a sale or transfer of the commodities by the hotelier or restaurateur to its customers.

The order was based on the provisions of the Prior Laws, which defined “sale” in a manner to exclude sale of goods as part of a composite contract of service. The High Court observed that restaurants and hotels provide a composite contract of service with incidental supply of goods. Therefore, even if a customer of a hotel or restaurant orders nothing beyond a bottle of water, he is enjoying a composite service and the supply of any goods thereunder would not be covered under the Prior Laws.

In 2009, the Prior Laws were repealed and the New Laws were enacted. The order was therefore appealed in a Letters Patent Appeal (“LPA”). In 2015, the division bench of the High Court disposed the LPA by maintaining status quo and recording that the decision under the Prior Laws would not prejudice any actions undertaken under the New Laws even if the provisions of the New Laws are identical to the Prior Laws.

Arguments

In appeal by way of Special Leave Petition (SLP) before the Supreme Court, the appellants contended that the order of the Division Bench transgresses the rights of the appellants as it has the effect of requiring the entire issue to be dealt afresh. The appellants further submitted that the position under the two statutes is identical due to the definition of “sale” remaining the same as that in the Previous Laws. Accordingly, it was prayed to set aside the order in the LPA.

The Respondent argued that even though there is no change in the definition of sale, the new law provides for the definition of “pre-packaged commodity”, which is squarely applicable to bottled water sold by hotels and restaurants. It was further argued that hotels and restaurants would fall within the scope of “institutional consumer” under the New Laws and provisions relating to such consumers be remain applicable to hotels and restaurants.

Judgment

In its decision, the Supreme Court framed the question relevant for consideration as follows:

Given the fact that the Legal Metrology Act, 2009 continues with the same definition of “sale” as was contained in the 1976 Act, whether the judgement of the learned Signe Judge can be said to be correct in law and applicable qua the 2009 Act.

In terms of the above, the Supreme Court stated that a cursory reading of the definition of “sale” under the Prior Laws as well as the New Laws evidences that it does not cover sale of goods occurring under composite contracts. The Court further distinguished the definition of “sale” under the Prior Laws and the New Laws vis-à-vis the amended definition of the term under Article 366 (29-A) (f) of the Constitution of India, which includes sale of goods as part of a composite contract.

Since the definition of “sale” was not amended under the Prior Laws despite the amended definition of “sale” under the Constitution, the Supreme Court held that New Laws would also not cover sale of goods under composite contracts. Therefore, the order of the single judge bench of the High Court was held to be correct and would continue to be applicable under the New Laws.

The above decision was rendered in the context of bottled water bearing MRP, however, the ratio may be logically extended to any goods bearing MRP and sold as part of composite contracts by hotels and restaurants to its customers.