Supreme Court clarifies applicability of Legal Metrology Act to hotels and restaurants: Federation of Hotel and Restaurant Associations of India vs. Union of India (2017)

Date of the Judgment: December 12, 2017
Citation: (2017) INSC 1084
Judges: R.F. Nariman, J., Navin Sinha, J.
Can hotels and restaurants charge more than the Maximum Retail Price (MRP) for packaged water bottles? The Supreme Court addressed this question, clarifying the scope of the Legal Metrology Act, 2009, and its applicability to the service industry. The Court held that the sale of packaged goods in hotels and restaurants is part of a composite service and not a simple sale and therefore, the Legal Metrology Act does not apply to such sales. The judgment was delivered by a division bench of Justices R.F. Nariman and Navin Sinha, with Justice R.F. Nariman authoring the opinion.

Case Background

The Federation of Hotel and Restaurant Associations of India filed a writ petition in the High Court of Delhi, challenging the applicability of the Standards of Weights and Measures Act, 1976, the Standards of Weights and Measures (Enforcement) Act, 1985, and the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, to services provided in hotels and restaurants. The core issue was whether hotels and restaurants could be prosecuted for charging prices higher than the printed MRP on packaged water bottles.

The appellant contended that the transaction in hotels and restaurants was primarily a service, with the supply of water being incidental. The charge was a composite one, covering not just the product but also the ambience and service. The Controller of Weights and Measures was seeking to prosecute hotels and restaurants for selling packaged water bottles above MRP.

Timeline

Course of Proceedings

The High Court of Delhi initially ruled in favor of the Federation of Hotel and Restaurant Associations of India, holding that charging prices for mineral water in excess of MRP during service did not violate the Standards of Weights and Measures Act. The Single Judge relied on previous Supreme Court judgments which held that the service element in hotels and restaurants is dominant and hence, the sale of goods was incidental.

However, in a Letters Patent Appeal, the Division Bench disposed of the appeals, stating that the judgment of the Single Judge would not impede the enforcement of the new Legal Metrology Act, 2009. The Division Bench left the question of law open for adjudication in any fresh proceedings under the new law, and clarified that the Single Judge’s judgment would not be a precedent. A subsequent Review Petition was dismissed.

Legal Framework

The case revolves around the interpretation of “sale” under the Standards of Weights and Measures Act, 1976, and the Legal Metrology Act, 2009. The definition of “sale” in both Acts is identical and reads as follows:

“sale”, with its grammatical variations and cognate expressions, means 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, and includes a transfer of any weight, measure or other goods on the hire-purchase system or any other system of payment by instalments, but does not include a mortgage or hypothecation of, or a charge or pledge on, such weight, measure or other goods;”

The Court also considered the constitutional amendment, specifically Article 366 (29-A)(f), which defines “sale” to include the supply of goods as part of a service. However, the definition of ‘sale’ in the 1976 and 2009 Acts remained unchanged despite this constitutional amendment.

The Statement of Objects and Reasons of the 1976 Act indicates that it was intended to protect consumers by ensuring proper indication of net quantity, identity of the commodity, manufacturer’s name, and price on packaged goods. The 2009 Act aimed to simplify the law and ensure accountability and transparency, but it did not alter the definition of “sale”.

Arguments

Appellant’s Arguments:

• The appellant argued that the judgment of the Single Judge, which was comprehensive and dealt with all the relevant legal points, should be upheld.
• The appellant contended that the concession made by their counsel before the Division Bench, which led to the appeals being disposed of without affirming the Single Judge’s ruling, was not binding. This was because it was a concession on a point of law and jurisdiction.
• The appellant pointed out that the definition of “sale” in the Legal Metrology Act, 2009, is identical to that in the 1976 Act. Therefore, the Single Judge’s judgment, if correct in law, should be confirmed.
• The appellant argued that despite the constitutional amendment introduced by Article 366 (29-A), which included the supply of goods as part of a service within the definition of ‘sale’, the definition of ‘sale’ in the 1976 and 2009 Acts remained unchanged.
• The appellant relied on the trilogy of judgments in M/s. Associated Hotels of India Ltd., and Northern India Caterers (India) Ltd., which established that the sale of food and drinks in hotels and restaurants is part of an indivisible contract of service, not a simple sale of goods.

Respondent’s Arguments:

• The respondent argued that the Supreme Court should not go into the jurisdictional question due to the concession made by the appellant’s counsel before the Division Bench.
• The respondent contended that even if the Court were to consider the merits of the case, the definition of “pre-packaged commodity” in Section 2(l) of the 2009 Act, read with Rule 3 explanation (1) of the Rules, would bring hotels within the scope of the statute.
• The respondent also referred to Section 57 of the 2009 Act, which repeals the 1976 Act, and argued that transactions made under the old Act would continue as a result.
• The respondent relied upon the definition of “institutional consumer” in Rule 3 of the 2011 Rules, arguing that hotels would fall under the coverage of the Act and Rules.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Given that the Legal Metrology Act, 2009, retains the same definition of “sale” as the 1976 Act, is the Single Judge’s judgment correct in law and applicable to the 2009 Act?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• The State of Punjab vs. M/s. Associated Hotels of India Ltd. (1972) 1 SCC 472 – Supreme Court of India
  • The Court relied on this case, which held that the service element in hotels is dominant and the sale of food and drinks is incidental.
• Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi [1979] 1 SCR 557 – Supreme Court of India
  • The Court relied on this case, which reiterated that the supply of food in restaurants is part of an indivisible contract of service.
• Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi (1980) 2 SCC 167 – Supreme Court of India
  • The Court relied on the review judgment of this case, which reaffirmed the principle that the service element in restaurants is dominant.

Statutes and Rules:

• Standards of Weights and Measures Act, 1976
  • The Court considered the definition of “sale” in this Act.
• Standards of Weights and Measures (Enforcement) Act, 1985
  • The Court considered this Act in conjunction with the 1976 Act.
• Legal Metrology Act, 2009
  • The Court considered the definition of “sale” and “pre-packaged commodity” in this Act.
• Legal Metrology (Packaged Commodities) Rules, 2011
  • The Court considered Rule 3 and its explanation regarding “institutional consumers”.
• Article 366 (29-A) of the Constitution of India
  • The Court considered this constitutional amendment, which defines “sale” to include the supply of goods as part of a service.

Judgment

The Supreme Court held that the Legal Metrology Act, 2009, does not apply to the sale of packaged goods in hotels and restaurants at prices above MRP. The Court reasoned that the definition of “sale” in the Act does not include composite contracts where the service element is dominant. The Court emphasized that the object of the Act is to standardize weights and measures and regulate the sale of packaged goods, not to regulate the service industry.

How each authority was viewed by the Court?

• The Court relied on The State of Punjab vs. M/s. Associated Hotels of India Ltd. [1972] 1 SCC 472* to reiterate that the service element in hotels is dominant and the sale of food and drinks is incidental.
• The Court followed Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi [1979] 1 SCR 557* and the review judgment in Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi [1980] 2 SCC 167* to confirm that the supply of food in restaurants is part of an indivisible contract of service.
• The Court considered the definition of “sale” in the Standards of Weights and Measures Act, 1976, and the Legal Metrology Act, 2009, noting that the definition remained unchanged despite the constitutional amendment.
• The Court considered Rule 3 of the Legal Metrology (Packaged Commodities) Rules, 2011, and held that it did not apply to packaged commodities meant for institutional consumers such as hotels.
• The Court noted that despite the constitutional amendment in Article 366 (29-A), which included the supply of goods as part of a service within the definition of ‘sale’, the definition of ‘sale’ in the 1976 and 2009 Acts remained unchanged.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The consistent interpretation of “sale” in the context of composite contracts involving services and goods.
• The unchanged definition of “sale” in the 1976 and 2009 Acts, despite the constitutional amendment.
• The primary object of the Legal Metrology Act, which is to standardize weights and measures and regulate the sale of packaged goods, not to regulate the service industry.
• The fact that hotels and restaurants provide a service, and the sale of packaged goods is incidental to this service.
• The fact that the Rules themselves exempt institutional consumers like hotels.

Fact:Law Ratio

The Court’s decision was primarily driven by legal considerations, with a focus on the interpretation of the term “sale” and the legislative intent behind the Acts. Factual aspects of the case, such as the nature of transactions in hotels, played a secondary role.

The Court’s reasoning was based on a step-by-step analysis of the legal provisions, the legislative intent, and the previous judicial pronouncements on the issue. The Court rejected alternative interpretations that would have brought hotels and restaurants under the purview of the Act, emphasizing that the primary object of the Act is to standardize weights and measures and regulate the sale of packaged goods, not to regulate the service industry.

The Court quoted the following from the judgment:

“It will be clear on a cursory reading of the said definition that “sale” means transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration.”

“As has been stated in the trilogy of judgments in M/s. Associated Hotels of India Ltd. (supra) and the two Northern India Caterers (India) Ltd. (supra), it is clear that when “sale” of food and drinks takes place in hotels and restaurants, there is really one indivisible contract of service coupled incidentally with sale of food and drinks.”

“We are, therefore, of the view that neither the Standards of Weights and Measures Act, 1976 read with the enactment of 1985, or the Legal Metrology Act, 2009, would apply so as to interdict the sale of mineral water in hotels and restaurants at prices which are above the MRP.”

There were no minority opinions in this case.

Key Takeaways

• Hotels and restaurants can legally charge more than the MRP for packaged water bottles and other packaged goods.
• The Legal Metrology Act, 2009, does not apply to composite contracts where the service element is dominant.
• The sale of packaged goods in hotels and restaurants is considered incidental to the service provided.
• The definition of “sale” in the Legal Metrology Act does not include the supply of goods as part of a service.

Directions

The Supreme Court set aside the judgments of the High Court dated 11.02.2015 and 15.05.2015.

Development of Law

The ratio decidendi of this case is that the Legal Metrology Act, 2009, does not apply to the sale of packaged goods in hotels and restaurants at prices above MRP because the definition of “sale” in the Act does not include composite contracts where the service element is dominant.

This judgment reaffirms the position of law established by the trilogy of judgments in M/s. Associated Hotels of India Ltd. and Northern India Caterers (India) Ltd., which held that the service element in hotels and restaurants is dominant and the sale of goods is incidental. This judgment also clarifies that the constitutional amendment in Article 366 (29-A) does not change the definition of “sale” in the Legal Metrology Act.

Conclusion

The Supreme Court’s judgment in Federation of Hotel and Restaurant Associations of India vs. Union of India clarifies that the Legal Metrology Act, 2009, does not regulate the pricing of packaged goods in hotels and restaurants. The Court emphasized that the sale of such goods is part of a composite service and not a simple sale. This decision provides much-needed clarity for the hospitality industry and ensures that hotels and restaurants are not subjected to unnecessary legal scrutiny for charging prices above MRP for packaged goods.

Category

Parent Category: Legal Metrology Act, 2009

Child Categories:

• Sale
• Maximum Retail Price (MRP)
• Hotels and Restaurants
• Service Industry
• Composite Contracts
• Pre-packaged commodity

Parent Category: Constitution of India

Child Categories:

• Article 366 (29-A)

Parent Category: Legal Metrology Act, 2009

Child Categories:

• Section 2(l), Legal Metrology Act, 2009

Parent Category: Legal Metrology (Packaged Commodities) Rules, 2011

Child Categories:

• Rule 3, Legal Metrology (Packaged Commodities) Rules, 2011

FAQ

Q: Can hotels and restaurants charge more than the MRP for packaged water bottles?

A: Yes, the Supreme Court has clarified that hotels and restaurants can legally charge more than the MRP for packaged water bottles and other packaged goods. This is because the sale of these items is considered part of a composite service, not a simple sale.

Q: Does the Legal Metrology Act apply to hotels and restaurants?

A: No, the Legal Metrology Act, 2009, does not apply to the sale of packaged goods in hotels and restaurants at prices above MRP. The Act is intended to regulate the sale of packaged goods, not the service industry.

Q: What is a composite contract in the context of hotels and restaurants?

A: A composite contract in hotels and restaurants refers to a transaction where the primary purpose is the provision of service (like ambience, service, etc.), and the sale of goods (like food and drinks) is incidental to that service. The service element is dominant in such contracts.

Q: Why did the Supreme Court rule in favor of the hotels and restaurants?

A: The Supreme Court ruled in favor of the hotels and restaurants because the definition of “sale” in the Legal Metrology Act does not include composite contracts where the service element is dominant. The Court also noted that the object of the Act is to standardize weights and measures and regulate the sale of packaged goods, not to regulate the service industry.

Q: Does this judgment mean that hotels and restaurants can charge any price for packaged goods?

A: While the judgment allows hotels and restaurants to charge above MRP, it does not mean they can charge any price. The prices should still be reasonable and not exploitative. However, the Legal Metrology Act does not regulate these prices.