PepsiCo, Inc v Commissioner of Taxation, [2024] FCAFC 86

A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (the “Bottler”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to the Bottler, for bottling and sale, and granted the Bottler the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (the “Seller“) to the Bottler. There was a similar arrangement for the licensed bottling and sale by the Bottler of Gatorade pursuant to an EBA with another U.S. company in the Pepsi group (“SVC”).

Perram and Jackman JJ stated (at para. 11) that “where parties to a conveyance have agreed the purchase price for a transfer on sale then the consideration for the transfer is that agreed price” and that the “ordinary meaning of the language used by the parties [in the EBA] … suggests that what was to be paid by the Bottler to PepsiCo/SVC or their nominated seller was a price being paid for the concentrate and therefore ‘as consideration for’ the sale of the concentrate” (para. 13). In rejecting the Commissioner’s submission that this meant that the trademark licence provided to the Bottler under the EBA was “being granted for nothing” (para. 17), they noted (at para. 19) that “the grant of the licence was also a significant benefit to PepsiCo/SVC.”

Thus, “the payments made by the Bottler to the Seller did not include an element which was a royalty for the use of the trade marks (since the payments were not in consideration for the right to use the trade marks)” (para. 37), so that no withholding tax could be imposed by the Commissioner on such consideration. Furthermore, such payments were derived by the Seller rather than by PepsiCo/SVC. These conclusions arose under the domestic withholding tax provision, so that no reference was required to the terms of the Australia-US tax treaty.

In his reasons, Colvin J stated (at para. 197):

[T]he EBAs … are properly construed as agreements to bottle, sell and distribute branded products, not as agreements for the supply of concentrate. It follows … that the amounts provided for by the EBAs as the prices for units of concentrate were partly amounts in consideration for the use of the trade marks which the Bottler was licensed to use.

However, he agreed with the majority that the amounts paid by the Bottler to the Seller were not owed to PepsiCo or SVC, and accordingly agreed with the majority that the PepsiCo and SVC appeals should be allowed.

A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (the “Bottler”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to the Bottler, for bottling and sale, and granted the Bottler the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (the “Seller“) to the Bottler. There was a similar arrangement for the licensed bottling and sale by the Bottler of Gatorade pursuant to an EBA with another U.S. company in the Pepsi group (“SVC”).

Perram and Jackman JJ found that, since as a matter of contractual interpretation, all of the amounts paid by the Bottler to the Seller were consideration for the sold concentrate, none of such payments could be treated as a trademark royalty that was subject to Australian withholding tax. Furthermore, none of the concentrate selling price was owed to either US company, so that such payments were not derived by a non-resident of Australia. Accordingly, the Commissioner’s assessment of Australian withholding tax on a portion of the consideration was reversed. These conclusions arose under the domestic withholding tax provision, so that no reference was required to the terms of the Australia-US tax treaty.

A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (the “Bottler”) pursuant to which an Australian subsidiary of PepsiCo (the “Seller”) sold concentrate to the Bottler and PepsiCo granted the Bottler the right to use the Pepsi and Mountain Dew trademarks in connection with its sales of the soft drinks. Before finding that the payments made by the Bottler to the Seller were not derived by PepsiCo, so that the latter could not be subject to the Australian withholding tax on trademark royalties paid to a non-resident, Perram and Jackman JJ stated (at para. 40):

It is well established that a direction by a creditor to a debtor to pay a third party constitutes a payment to the creditor. … Nevertheless, it is also recognised that there can be no payment by direction unless there is an antecedent monetary obligation owed by the Bottler to PepsiCo/SVC… .