Commissioner of Taxation v PepsiCo Inc, [2025] HCA 30

A U.S. company (“PepsiCo”) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (“SAPL”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to SAPL for bottling and sale, and granted SAPL the right to use the Pepsi and Mountain Dew trademarks in this regard. A Singapore company (“CMSPL”) in the PepsiCo group produced the concentrate, and sold it (at a mark-up over its costs of 0.05%) to an Australian company in the PepsiCo group (“PBS”) which, in turn, supplied it to SAPL and invoiced SAPL therefor. Similar facts applied to an ERB between SAPL and another U.S. corporation (Stokely-Van Camp, Inc., or “SVC”) respecting the bottling of Gatorade under a licence of that trademark.

At issue was whether any portion of the payments made by SAPL constituted a royalty “derived” by PepsiCo (or SVC) from an Australian resident (SAPL) so as to be subject to Australian withholding tax under the Income Tax Assessment Act 1936 (Cth). A “royalty” was relevantly defined as amounts paid or credited as consideration for the use of or the right to use various listed types of intellectual property, including trademarks.

In concluding that the amounts paid by SAPL to PBS were not a royalty, and after discussing the meaning of "consideration for", the majority stated (at para 174):

The Commissioner did not dispute that [the concentrate price] was an arm's length price, or a fair price, or that it was not disproportionately high. When the price paid for goods has those characteristics, it cannot be said that a part of the price paid for those goods is payment of a royalty for the use of intellectual property applied to products partly made with those goods. Observing that the sale of the products produced using the goods increased the value of the PepsiCo Intellectual Property does not show that SAPL paid any part of the amount paid for concentrate to, or for the benefit of, PepsiCo for using the PepsiCo Intellectual Property.

Regarding the question of whether, if instead payments by SAPL had been a royalty, PepsiCo would have derived any amount as a royalty (which the Commissioner accepted required that there have been an antecedent obligation between PepsiCo and SAPL which was being satisfied by payments made under direction), the majority noted that although the ERB had required SAPL in the future to enter into a contract to buy concentrate on specified terms, such clause “did not change the parties to the subsequent transactions for the sale of concentrate, namely PBS and SAPL” so that “[i]f SAPL failed to pay for the concentrate supplied by PBS, it was PBS as the contracting party that had an action for debt under those sale transactions.” (para. 185)

The Commissioner's appeal was dismissed.

In finding that the purchase price paid by an Australian bottler for concentrate could not be recharacterized as a royalty, which under the Australian taxing act was relevantly defined as amounts paid or credited as consideration for the use of or the right to use various listed types of intellectual property, including trademarks, the majority stated (at paras. 160-161, footnotes omitted):

The word "consideration" has multiple meanings and shades of meaning. In the modern law of contract, "consideration" has developed as a concern with reciprocity, or a "quid pro quo" between an offered promise and acceptance. But another meaning of consideration which applied in circumstances broader than modern contracts, such as a conveyance or the making of a payment, was a "moving cause" or a "material cause" for the payment. In this broader, alternative sense, the "consideration" for a payment was the "purpose" of the payment or conveyance, or the "basis" or "condition" upon which it is made.

In Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW), Dixon J explained that in s 66 of the Stamp Duties Act 1920-1940 (NSW) the word "consideration" refers to the "money or value passing which moves the conveyance or transfer", not simply a consequence or aspect of an offer and acceptance. Similarly, the phrase "consideration for" in the definition of "royalty" in s 6(1) of the ITAA 1936 is unlikely to be confined to whether there is a quid pro quo in the making of an offer and acceptance of that offer. The definition of "royalty" refers to an amount "however described or computed" and to an amount "to the extent to which" it is paid as consideration for the right to use intellectual property. The phrase "consideration for" in the definition of "royalty" in s 6(1) of the ITAA 1936 extends to the "basis", "purpose", or "condition" for a transaction by which one party confers a benefit upon another.192 Of course, whether a payment is a basis, purpose or condition "for" the conferral of the use of intellectual property will always depend upon what the parties have agreed. In that respect, the word "for" connotes a causal connection between the making of a promise to pay or confer some other benefit and the receipt of a right to use the intellectual property. That connection will be satisfied when the giving of the promise can be seen to be the basis for, or a condition of, that receipt. In the present case, it cannot.