PepsiCo – High Court of Australia declines to recharacterize, as a royalty, FMV sales proceeds of concentrate paid to an Australian sub of PepsiCo, the trademark licensor

A U.S. company (“PepsiCo”) entered into an “exclusive bottling appointment” (“EBA”) with an arm’s-length 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 in the PepsiCo group produced the concentrate, and sold it (at a 0.05% mark-up) to an Australian company in the PepsiCo group (“PBS”) which, in turn, supplied it to SAPL and invoiced SAPL therefor.

At issue was whether any portion of the payments made by SAPL constituted a royalty “derived” by PepsiCo from an Australian resident (SAPL), so as to be subject to Australian withholding tax. 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, the majority stated:

The Commissioner did not dispute that [the concentrate price] was an arm's length price, or a fair price … . 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.

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.”

The Commissioner's appeal was dismissed.

Neal Armstrong. Summary of Commissioner of Taxation v PepsiCo Inc, [2025] HCA 30 under s. 212(1)(d).