• This judgment was the subject of a Special leave application.

PepsiCo Inc & Anor v FC of T

Judges: Perram J

Colvin J
Jackman J

Court:

MEDIA NEUTRAL CITATION: [2024] FCAFC 86

Judgment date: 26 June 2024

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Colvin J

136. These appeals concern agreements by which the holders of intellectual property in established and valuable beverage brands agreed to supply to a buyer the essential (and secret) components to make the beverages so that the buyer could make and sell the branded beverages to its own customers. The issue at the heart of the appeals is whether any part of the amounts of money paid by the buyer under the agreements was paid as consideration for the use of the brands or would have been but for a scheme in the form of the agreements.

137. I have the considerable advantage of being provided with a draft of the joint reasons of Perram and Jackman JJ. Respectfully, in certain respects, I have reached a different view. These reasons are confined to those matters of difference. Save in one respect, I adopt the same defined terms as the joint reasons. In the joint reasons the term Seller is used to refer to the supplier, in fact, of the concentrate, being the essential components used to make the beverages. In these reasons, the term Seller is used in the same manner as in the agreements in issue (EBAs) to refer to the supplier of the concentrate irrespective of whether it may be PepsiCo or SVC (as the case may be) or a related entity nominated as the supplier in accordance with the terms of the EBAs.

138. As has been explained in the joint reasons, the EBAs were entered into between each of PepsiCo and SVC on the one hand and the Bottler on the other hand. Broadly speaking, there are two aspects to the appeal proceedings. The first concerns whether the agreed price paid for concentrate as provided for by the EBAs included royalties which were derived by PepsiCo and SVC as income such that they were liable to pay withholding tax on the royalty amounts. The second, which arises only if there is no withholding tax liability, concerns whether entry into each of the EBAs was a scheme that gives rise to a diverted profits tax liability. As to the withholding tax aspect there were two main issues, namely:

• (1) Whether, upon the proper construction of the EBAs (and in the manner in which they were performed), the agreed price was not payable in consideration for the concentrate alone but was payable as to part as a royalty.
• (2) Whether amounts paid to the related party supplier of the concentrate under the terms of the EBAs constituted income derived by PepsiCo and SVC even though not received by them.

139. In the reasons which follow, references to PepsiCo should be read as also describing the position in relation to SVC unless otherwise stated. I will also generally use the terms brands or trade marks as a shorthand for the intellectual property that the EBAs impliedly or expressly authorised the Bottler to use.

Key aspects of the EBAs

140. The relevant provisions of the EBAs are referred to in the joint reasons. In summary, by the terms of the EBAs:

• (1) PepsiCo appointed the Bottler to bottle, sell and distribute, branded beverages under trade marks owned by PepsiCo;
• (2) PepsiCo (impliedly) and SVC (expressly) licensed the Bottler to use the trade marks;
• (3) PepsiCo agreed to sell ' or cause to be sold by [a Related Entity ] ' (in either case, the selling party being referred to in the EBAs as ' the Seller ' ) to the Bottler all units of concentrate required for the manufacture of the beverages by the Bottler;
• (4) the Bottler agreed to buy the required concentrate ' only from the Seller ' ;
• (5) a price per unit at which the Bottler agreed to buy the concentrate from the Seller was specified;
• (6) no monetary consideration other than the price per unit for concentrate was specified;
• (7) the Bottler was required to sell the beverages in the territory under the trade marks;
• (8) the Bottler was restricted as to the extent to which it could sell certain other beverages; and
• (9) there were terms governing the permitted advertising by the Bottler of beverages produced from the concentrate and sold using the trade marks as well as certain other matters relating to the sale of the beverages by the Bottler.

141. The EBAs dealt with much more than the supply of concentrate to the Bottler. Due regard to the terms of the EBAs as a whole reveals a dealing between the parties pursuant to which the Bottler was to bottle, sell and distribute branded beverages. The EBAs also dealt with the territory in which that could occur, the extent to which other beverages could be sold by the Bottler and significant aspects of the Bottler ' s business activities in distributing beverages bearing PepsiCo ' s brands.

142. As to the brands, the unchallenged finding of the trial judge was as follows (at TJ[248]):

I note also that the Pepsi brand is one of the strongest and most valuable brands in the global beverage industry. The Mountain Dew and Gatorade brands are also strong and valuable brands in that industry.

143. Based upon that finding, the trial judge reasoned that: ' In these circumstances, it would be very surprising if PepsiCo and SVC were prepared to licence the relevant trade marks for nothing ' . That further reasoning is challenged. However, it is not suggested in the appeal that there was any error in the finding by the trial judge that the brands were strong and valuable. That is to say, it is not suggested that the provisions of the EBAs concerned with the use of the trade marks were dealing with intellectual property that was of little or no commercial value, or which was in need of the support of a good distributor in order to be able to secure sales. On the evidence the PepsiCo brands were already strong and valuable. Indeed, in other unchallenged findings, the trial judge determined a commercial royalty rate for the use of the trade marks by the Bottler.

144. As to the terms of the EBAs that concerned the supply of the concentrate, the Bottler promised to PepsiCo to buy the concentrate at the specified unit prices ' only from the Seller ' . However, it was entirely up to PepsiCo whether ' the Seller ' was PepsiCo or a Related Entity. The EBA could be performed with PepsiCo as the Seller of the concentrate or with a Related Entity as the Seller. Apart from the provision which allowed PepsiCo to perform the EBA by causing a Related Entity to sell the concentrate to the Buyer, all other terms of the agreement required performance by PepsiCo on the one hand and the Bottler on the other hand. Even where PepsiCo caused a Related Entity to be the Seller, there was still a promise in the EBA by the Bottler to PepsiCo to buy from the Seller at the agreed unit prices. That is to say, in such a case, failure to pay the Seller would be a breach of any supply terms established as between the Related Entity (as Seller) and the Bottler, but would also be a breach of the EBA that would give rise to remedies that could be exercised by PepsiCo directly against the Bottler. All of which is to expose the way in which the buying of concentrate by the Bottler from a Related Entity as Seller should not be viewed as performance of an obligation that does not subsist as between the Bottler and PepsiCo. Quite the contrary.

145. The EBA to which SVC was a party had additional provisions concerned with delivery of the concentrate, provision of estimates of its concentrate requirement, passing of property and risk and an express obligation to pay SVC or the Related Entity ' within 28 days after the invoice, which shall be issued on the date of delivery ' . That is to say, in the case of the EBA with SVC there were more detailed promises in favour of SVC concerning the terms of supply of the concentrate that also applied irrespective of whether the supply was by SVC or a Related Entity as Seller.

146. As has been indicated, the EBA with SVC provided expressly for the grant to the Bottler of a licence to use the intellectual property described in the EBA (particularly, the trade marks for the beverages). That provision referred to the grant of ' an exclusive royalty-free licence ' . The trial judge found that the way the licence was described in the EBA with SVC was not determinative of the characterisation of the amounts agreed to be paid under the EBA: TJ[249]. For reasons given below, that conclusion must be correct. The label or description given by SVC to the amounts that were required to be paid under the EBA could not be determinative. As is explained below, the relevant inquiry concerned what the agreed amounts to be paid under the EBAs were ' consideration for ' .

Key aspects of the manner in which the EBAs were performed as to the supply of concentrate

147. The way in which the concentrate was supplied to the Bottler under the terms of the EBAs is dealt with in the joint reasons. Those reasons reflect the unchallenged findings of the trial judge as to how the concentrate was supplied: TJ[7]. In summary:

• (1) concentrate was produced in Singapore by a subsidiary of PepsiCo;
• (2) the concentrate was supplied to an Australian subsidiary of PepsiCo;
• (3) PepsiCo nominated the Australian subsidiary as the Relevant Entity to be the Seller of the concentrate under the EBAs;
• (4) the Australian subsidiary supplied concentrate to the Bottler and invoiced the Bottler for the concentrate; and
• (5) the Bottler paid the Australian subsidiary for the concentrate in accordance with those invoices.

148. The amounts invoiced by the Australian subsidiary to the Bottler for the concentrate reflected the unit prices for concentrate agreed in the EBAs. When the invoices were paid by the Bottler to the Australian subsidiary no part was as monies received on behalf of PepsiCo. Instead, the Australian subsidiary paid an ' arm ' s length price ' to the producer of the concentrate retaining a small margin. Profits on the sale of the concentrate were earned by the manufacturer of the concentrate (another PepsiCo entity, which was incorporated in Singapore). No amounts were paid to PepsiCo or SVC even though those parties were the ones granting the right to use the trade marks.

149. Significantly, as is explained in the joint reasons, the arrangements by which the Australian subsidiary supplied the concentrate involved direct dealings as between the Australian subsidiary and the Bottler. Those dealings were conducted in a way in which the full amount agreed as the price per unit of concentrate under the terms of the EBA was invoiced by the Australian subsidiary as the price for the supply of the concentrate.

The nature of the proceedings before the trial judge

150. The Commissioner issued assessments for royalty withholding tax. PepsiCo brought proceedings seeking declaratory relief to the effect that there was no liability to pay royalty withholding tax in the relevant years. It was for PepsiCo to demonstrate a basis for that relief.

151. The Commissioner also issued diverted profits tax assessments. He only sought to rely upon the appeals under Part IVC of the Taxation Administration Act 1953 (Cth) in respect of those assessments. As explained in the joint reasons, in those appeals the burden was on PepsiCo to demonstrate that the assessments were excessive.

152. The trial judge found that there was liability to pay royalty withholding tax on part of the amounts paid for the concentrate. Alternatively, if that view was wrong, the trial judge would have found that the appeal against the diverted profits tax assessments should not be allowed.

153. PepsiCo and SVC appealed against the decision of the trial judge as to withholding tax. The Commissioner brought appeals against the decision of the trial judge as to the diverted profits tax. The Commissioner ' s appeals were predicated on success by PepsiCo and SVC in its appeals.

The withholding tax appeals

Whether part of the amounts paid by the Bottler were ' as consideration for ' the relevant intellectual property?

154. The relevant statutory provisions are addressed in the joint reasons. As there explained, s 128B of ITAA 1936 imposes withholding tax on income that includes a royalty. Relevantly for present purposes, a royalty includes ' any amount paid or credited, however described or computed … to the extent which it is paid or credited … as consideration for … the use of, or the right to use, any … secret formula or process, trade mark, or other like property or right ' : s 6(1) of ITAA 1936. Amongst other circumstances, the withholding tax provision for royalties applies to income derived by a non-resident that consists of a royalty that is paid to the non-resident: s 128B(2B).

155. Each of PepsiCo and SVC are non-residents incorporated in the United States. By reason of the terms of the definition of royalty, in determining whether income derived by a non-resident ' consists of a royalty ' , it does not matter how the amount paid or credited to the non-resident is described or computed: see s 6(1) of the ITAA 1936.

156. Significantly, the definition of royalty in the ITAA 1936 does not direct attention to the terms in which an amount is described. Rather, it focusses upon whether an amount is paid as consideration for relevant intellectual property. The manner in which an amount is described or computed cannot answer that question. It may have relevance, but it could not be determinative. Therefore, the express language in the definition that includes an amount ' however described or computed ' if it is paid as consideration for relevant intellectual property makes explicit that which would be the case even without those words. That is to say, neither the labels used to describe the consideration nor the way in which the consideration is calculated could determine whether an amount was paid as consideration for relevant intellectual property.

157. The same concept of payments ' to the extent to which they are consideration for the use of or the right to use [relevant intellectual property, including trade marks] ' is used in the international tax agreement to define the term royalties. As explained by the trial judge, the royalty withholding tax provisions in the ITAA 1936 only apply to United States corporations to the extent that the international agreement treats the amount paid as a royalty: TJ[233]-[235]. The international agreement provides that royalties as defined in the international agreement ' may be taxed in the [State] in which they have their source, and according to the law of that State ' . PepsiCo ' s appeal was conducted on the basis that a conclusion that there was a royalty withholding tax liability under the ITAA 1936 would mean that PepsiCo was taxable as to those royalties according to Australian tax law. That is to say, it was not contended that there may be circumstances in the present case where the Australian law applied but there was no liability because of the extent to which the international agreement treated amounts paid as a royalty.

158. It may be observed that where an amount is required to be paid under an agreement, the parties to that agreement may have no concern to identify precisely the consideration for which the amount is payable. Indeed, it is quite likely that amounts that are agreed to be paid may not be separated into components that correspond to different aspects of the consideration for which the amount is paid because there would be no commercial need to do so. Equally, an agreement may provide for an amount to be calculated and paid by reference to some relevant unit of product being supplied under the agreement as a convenient rateable measure of the commercial value of the whole of the consideration moving under the agreement. The use of that unit does not mean that the consideration is paid for that product and nothing else.

159. For example, say an agreement is reached with a prospective tenant to both lease premises and to conduct a business from the premises using a well-known name belonging to the landlord in circumstances where the name has considerable associated goodwill. There may be no commercial reason for the parties to separately identify a part of the ' rent ' that is attributable to the right to use the business name. Views may differ as between the landlord and the tenant as to the appropriate allocation even where they can agree on the overall ' rent ' . In consequence, the only payment agreed may be for the payment of monthly ' rent ' . If so, despite the use of the term rent, an issue would arise as to whether, on the proper construction of the agreement, the rent was to be paid ' for ' possession of the premises or ' for ' possession of the premises as well as the use of the name. In such a case, the inclusion of an express promise that the tenant also has the right to use the business name for the term of the lease may found a conclusion that the agreed rent included consideration for the grant of that right. That may be so even where the only provision in the agreement as to payment of money is a provision that the landlord agrees to lease the premises to the tenant for the amount of the rent. That is to say, it is not necessary for the term conferring the right to use the business name to state expressly that it is also given in consideration for payment of the rent in order for that to be the case.

160. If the question is approached as a matter of contractual construction, then there may be ambiguity as to whether the specified monetary consideration is for the lease of the premises or whether it is for the lease and the use of the name. Resolution of that ambiguity may justify resort to surrounding circumstances known to the parties such as the fact that the goodwill associated with the name was very valuable or that the prevailing market rent for the premises was less than half the agreed ' rent ' .

161. In such a case, absent any such evidence, the fact that the agreement (a) uses the term ' rent ' ; (b) expresses the amount of the rent as being paid for the lease of the premises; and (c) does not expressly refer to the grant of the right to use the name as also being conferred in consideration for the rent to be paid under the agreement, may lead to the conclusion that the monetary consideration (in the amount of the rent) is paid only for the promise to lease the premises. All would depend upon what might be concluded from the words used in the agreement.

162. As noted in the joint reasons, in the present case, both PepsiCo and the Commissioner approached the question whether the prices paid by the Bottler to buy concentrate as required by the terms of the EBAs were amounts paid in consideration for the use of relevant intellectual property on the basis that it was to be resolved as a matter of construction. The Commissioner called in aid the principles concerned with construing commercial instruments so as not to cause an uncommercial result:
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37 ; (2015) 256 CLR 104 at [51] (French CJ, Nettle and Gordon JJ). He submitted that the EBAs should be construed in the light of their applicable business and commercial context, relying upon
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 ; (2014) 251 CLR 640 at [35] (French CJ, Hayne, Crennan and Kiefel JJ). This had been the approach of the trial judge: TJ[240]. As has been explained, a key aspect of the reasoning by the trial judge was the fact, known to the parties, that the PepsiCo brands were strong and valuable.

163. Respectfully, it is difficult to see why an answer to the question posed by the terms of s 128B of the ITAA 1936 as to whether an amount was paid as consideration for use of relevant intellectual property would be determined solely by reference to the express terms of the agreement (that is by applying principles developed to determine the nature and extent of the rights and obligations that are enforceable as promises according to the law of contract) and without regard to other evidence. Whether an amount has been paid ' as consideration for ' relevant intellectual property (and is therefore a royalty as defined) is a statutory question. On the face of the provision, it is a question to be determined having regard to all of the evidence as to the circumstances in which the amount is paid. In a case, like the present, where the amount has been paid under the terms of an agreement then the answer to that question could not ignore the terms of the agreement. Further, absent some claim that the agreement was a sham, any conclusion would have to conform to the legal character of the agreement (that is to say, the nature and extent of the contractual obligations giving rise to the payment of the amount). So, it could not be posited that the consideration was for the benefit of some form of promise not to be found in the agreement or on the basis that ' in substance ' the agreement was for something that was not provided for by the terms of the agreement. However, that is a different thing to resolving the entire question as a matter of construction of the terms of the agreement.

164. Accordingly, in my view, in the example given above, I would not reject the possibility that evidence that the amount paid substantially exceeds the market rental value of the premises might be relevant even if there was no suggestion that the market rental value was commonly known to the parties at the time they made their agreement. Likewise, evidence to the effect that the rent was expressly determined on the basis that the right to use the business name was of significant monetary value to the tenant or evidence as to the extent of the market value of the goodwill associated with the name may well be relevant. At the very least, it seems to me that there is uncertainty as to whether the statutory terminology requires singular focus upon the proper construction of the agreement where the relevant amount is paid under the agreement.

165. In the present case, the Commissioner did advance written submissions which appeared to rely upon evidence of that broader kind (but seemingly on the basis that there could be regard to that evidence as being relevant to the proper construction of the EBAs). For example, reliance was placed upon evidence that supply of the concentrate and the brands ' always go together ' for PepsiCo and other evidence to the effect that a royalty was charged as a way of generating revenue for a bottling arrangement for the Aquafina trade mark where there was no concentrate to be supplied. However, in oral submissions, the position put by the Commissioner was that the issue whether there was a royalty was to be determined upon the proper construction of the EBAs.

166. The submissions for PepsiCo, on the other hand, were squarely put on the basis that the question concerning whether the amount was paid as consideration for the use of relevant intellectual property was to be determined on the basis of the proper construction of the EBAs and the manner in which they were performed when it came to the supply of the concentrate. Other evidence was referred to in the context of purpose as relevant to the diverted profits tax appeals by the Commissioner. However, no reliance was placed upon that evidence when it came to s 128B of the ITAA 1936.

167. In those circumstances, as no case was put to the effect that evidence beyond that admissible to resolve ambiguity in the terms of the EBAs may be relied upon, I express no concluded view as to whether it is possible to have regard to matters beyond the terms of the EBAs as properly construed in reaching a conclusion as to whether the price paid by the Bottler was as consideration for anything more than the concentrate, specifically a licence to use the trade marks of PepsiCo. I also approach the resolution of that question in the same manner as the parties, namely as a question of construction applying contractual principles. In effect, by their common approach, the parties agreed to confine the evidence that might be considered in resolving the statutory question and focussed upon what might be discerned from the terms of the EBAs having regard to the fact that they were performed by the concentrate being supplied by a Related Entity and not by PepsiCo (or SVC as the case may be).

168. As the joint reasons explain, there are authorities that have dealt with the proper approach where the task to be undertaken is the identification of the consideration for an amount paid under an agreement in the context of taxing provisions imposing duty on the dealing the subject of the agreement. I deal with those authorities below.

169. First, there is the decision of Bennett J in
International Business Machines Corporation v Commissioner of Taxation [2011] FCA 335 . In that case, her Honour considered applications for declarations that certain corporations were not liable to pay withholding tax on the full amount of certain payments (referred to as Payments ) made to each of them under the terms of software licence agreements. The Commissioner contended that the whole of the Payments were royalties. The corporations contended that only part of the Payments were of that kind: at [17]. Her Honour was concerned with the proper construction of the term ' royalty ' as used in an international agreement (which operated to limit the circumstances in which the Australian royalty withholding tax provisions might apply to United States corporations). It too deployed a definition of royalty that applied to payments to the extent to which they ' are consideration for the use ' of relevant intellectual property rights: at [18].

170. As noted in the joint reasons, her Honour expressed the view that the question whether the Payments were ' for ' the use of relevant intellectual property rights ' is determined by the construction of the [agreements pursuant to which the Payments were made] ' : at [19], see also [41]-[42]. Her Honour rejected a submission to the effect that any part of the consideration was paid for distribution rights for the software, thereby finding that the whole of the Payments were for royalties.

171. The case for the corporations involved an attempt to characterise the software licence agreements as distributor agreements. They contended that the provision in the agreements whereby fees were payable for the rights granted under the agreement (which included a non-exclusive right to ' license and distribute copies ' of software) were also paid for rights which were not intellectual property rights (which it sought to characterise as distributorship rights).

172. After considering the competing contentions of the parties and the terms of the software licence agreements, Bennett J concluded at [52]:

Taking the whole of the [software licence agreement] into account, it is in my view clear that the [software licence agreement] grants to [the corporations] such IP rights as are necessary for distribution of the relevant products by [the corporations]. It is not a distribution agreement which confers distribution rights independently of the grant of IP rights. The detail of the [software licence agreement] concerns the definition of IP and IP rights. There is no such detail with respect to distribution rights.

173. To reason in that manner was to construe the terms of the software licence agreement in order to characterise the nature of the commercial dealing recorded in the agreement, having regard to all of its terms, so as to reach a conclusion as to the consideration for which the fees provided for by the agreement were payable. On her Honour ' s approach, the inquiry does not end with what the terms of the agreement say (on their proper construction). It requires regard to the whole of the terms of the agreement (as properly construed) to characterise the nature of the commercial dealing effected by the agreement before reaching a conclusion, based upon an understanding of the nature of that dealing, as to whether the monetary consideration moving from one party to another was paid (in whole or in part) as consideration for the use of relevant intellectual property.

174. Applying the same approach to the present case, regard to the whole of the terms of the EBAs reveals that they are not properly characterised as agreements for the supply of the concentrate that is needed to make the beverages. Nor are the EBAs as a whole properly described as agreements by which a commitment is secured from the Bottler to buy its concentrate requirements from PepsiCo or a Related Entity. Rather, by the EBAs, the Bottler is appointed to bottle, sell and distribute the branded beverages in the territory for the term of the agreement. The EBAs include a mechanism by which PepsiCo may nominate a Related Entity to be the Seller (and the recipient of the monetary consideration provided for by the EBAs). As has been explained, the nomination occurred in this case so there is the additional question whether the fact that PepsiCo exercised the right to perform the EBA in that way (by the concentrate being supplied by a Related Entity) might have a bearing upon a conclusion as to whether the amount, when paid, was consideration for the trade marks. The significance of these matters is addressed below.

175. The important matter to note at this point, is that the approach outlined by Bennett J requires an understanding of the nature of the commercial dealing expressed by the terms of the agreement in order to reach a conclusion as to what an amount was paid ' as consideration for ' where that amount was paid under the terms of the agreement.

176. The rest of the authorities referred to by the parties do not deal with a question of the kind posed by the present case. Rather, they are directed to identifying the amount of the consideration for a dutiable transaction or dealing. Nevertheless, they provide some insight into the way in which an analysis of the commercial character of the overall dealing or transaction recorded by the agreement forms part of the reasoning process by which a conclusion as to what amounts paid under the agreement are paid for (as well as whether those amounts represent full value for that for which they are paid) is reached based upon a proper construction of the terms of the agreement.

177. The authorities begin with the decision in
Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 . In that case, shares were transferred to give effect to an order made approving a reduction in capital. The question was whether, for stamp duty purposes, the transfer was made ' upon a bona-fide consideration in money or money ' s worth of not less than the unencumbered value of the property conveyed ' . The reduction in capital was effected by distribution of property in specie (in the form of shares held by the company) and a small amount of cash. The value of the property received by shareholders was greater than the amount of capital that had been contributed.

178. Dixon J (Rich J agreeing and Williams J concurring) described the transaction as both (a) ' an effectuation or realization of the rights obtained by the acquisition of the share in the same way is the distribution of a dividend ' ; and (b) a discharge of rights in company law to share in the assets (including those in excess of share capital contributed) to be distributed in proportion to the shareholding: at 152-153. In the view of Dixon J, it was significant that the reduction in capital was not expressed as a reduction that was to be effected by paying a specified amount to the shareholder (being the capital contributed) which ' would have doubtless been regarded as the acquisition of assets for a consideration expressed in money ' . Instead, he described the reduction in the particular case as being effected by direct allocation of assets for distribution according to the proportionate interest of the shareholder in those assets.

179. In the course of that reasoning, Dixon J said that in the context of that case, ' the word " consideration " should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts ' . His Honour said that under the relevant stamp duty provision ' the consideration is rather the money or value passing which moves the conveyance or transfer ' : at 152.

180. Therefore, as the consideration moving the transfer was not an obligation to pay a particular price but rather was the allocation of assets to which the shareholder was entitled in that capacity, the consideration given was as to the whole of that right not just to the extent of the amount of capital as originally contributed. In consequence there was no transfer at the price originally subscribed for the shares and no transfer at an undervalue.

181. For present purposes it may be noted that the analysis in Archibald Howie was undertaken by focussing upon the legal nature of the transaction revealed by a proper construction of the agreement and analysing the nature of the consideration actually moving the transaction. Properly analysed the transaction was not the return of the amount of money that had been subscribed by the shareholder but was the discharge of the whole of the right which the shareholder had to receive a share in the assets held by the company in proportion to the shareholding. As applied to the present circumstances, such an approach requires an evaluation as to whether the transaction recorded in the EBAs which gave rise to the obligation to pay the agreed price per unit of concentrate was such that the monetary consideration actually moving the transaction included a royalty for the use of the trade marks. On the approach in Archibald Howie the answer to that question requires a proper characterisation of the transaction undertaken by reference to the terms of the EBAs construed in the context of relevant surrounding circumstances.

182. Next there are the three High Court cases referred to in the joint reasons, namely Davis , Dick Smith and Lend Lease .

183. In Davis the High Court was concerned with the application of stamp duty provisions where 57 shares held by a company were transferred to its holding company. As explained by Dixon CJ (at 405):

… the transaction is expressed as a sale and purchase of the shares in the other companies at prices which are in fact par, that is to say at £ 1 each. But the value of the fifty-seven shares is not £ 57: it is £ 54,382 … What the transfer meant to the holding company was a change of the form of property containing this value. That is to say, by the transfers that company would become the immediate owner of the shares which theretofore were the property of the company whose share capital it held.

184. The issue for the High Court in Davis concerned what was the consideration for the transfers for the purposes of stamp duty (not what the consideration was for). If the consideration was equal to the full value (by reason that the holding company did not accrete any additional value through the transaction) then the stamp duty was low. However, if the consideration for the transfer was the price of £ 57 then the stamp duty was considerable. Dixon CJ described the relevant inquiry as being ' whether the consideration for the transfers if and when executed would be what is nominated in the agreement as the price or would be the full value ' : at 406. As to the answer to that question, his Honour said (at 406-407):

Neither the nature nor the effect of the transaction is open to much question. The matter is really one of ' characterisation ' . Must the price be characterised as the consideration or is it proper to characterise the further elements in the transaction which determine or govern its real effect the consideration? Assuming, as I think we should, that the transfer of the shares would not deprive the transferor company of assets representing paid-up share capital, the shares to be transferred must contain, in point of value, either accumulated trading profits or some accretion to capital over and above the equivalent of the paid-up share capital of the company. Such a ' fund ' , whether real or notional, would be ' distributable ' . In any case to sell and transfer these shares to the only shareholder of the company at a price which must amount to a nominal or book price effects a ' distribution ' of the trading or capital profit contained in or represented by the shares. It places in the shareholder ' s hands the trading or capital profit contained in or represented by the shares.

185. His Honour went on to analyse the nature of the transaction effected by the parties. The earlier decision in Archibald Howie was distinguished on the basis that it ' dealt with a transfer made wholly in pursuance of a resolution and order for the reduction of capital … [as] a method of effectuating the rights of shareholders ' and that was the full extent of the transaction. As to the case at hand, his Honour reasoned that the transaction having been cast as a sale and purchase of shares it could not be recast as a means of effectuating the rights in the shares. As the nature of the dealing was a sale and purchase of shares, the consideration was the price as fixed by the parties for the sale and purchase. Therefore, it was £ 57.

186. The reasoning in Davis reveals that the conclusion was reached because the legal nature of the agreement reached was one in which shares were to be transferred for a price. Applied to the present case, reasoning of that kind would only lead to the conclusion that the amounts paid in the present case were not paid as consideration for the trade marks if the EBAs were confined to expressing the terms of supply of concentrate to PepsiCo. They are not. As has been explained, the EBAs provide for much more. Therefore, Davis does not assist in resolving a case like the present where the agreement has other dimensions, save that (like Archibald Howie ) it places an emphasis upon understanding the precise character of the commercial dealing effected by the terms in which the agreement is expressed.

187. In Dick Smith , the issue again concerned the consideration for the purposes of a dutiable transaction which involved the transfer of shares. The shares were transferred under an agreement which defined the purchase price as a specified amount ' minus the Dividend Amount ' . The ' Dividend Amount ' was to be all retained earnings which the company was able to pay to shareholders before settlement on the purchase of the shares. Clause 5 of the agreement provided for the sales of the shares for the purchase price as defined. As to that provision, the majority (Gummow, Kirby and Hayne JJ) said at [54]:

It would be a misstatement of the operation of the Agreement, and of the transaction for which it provided, to refer simply to cl 5 and the statement therein that the Purchaser will purchase the Shares for the Purchase Price, for the conclusion that it was the receipt by the Vendors of that payment alone which supplied the monetary consideration actuating or moving the transfer of the Shares by the Vendors to the Purchaser. It is necessary to look further into the provisions of the Agreement.

(emphasis added)

188. The relevant statutory provision levied duty on the ' dutiable property ' by reference to the greater of ' the consideration (if any) for the dutiable transaction ' and ' the unencumbered value of the dutiable property ' .

189. Their Honours began at [71] by referring to Archibald Howie and Davis as authority for the proposition that the reference to ' consideration ' was not to be read ' as requiring identification of the consideration sufficient to support a contract ' . Rather, it should receive its wider conveyancing meaning as ' the money or value passing which moves the conveyance or transfer ' (quoting from Dixon J in Archibald Howie ). They explained that the reference to ' consideration for ' the transaction looks to ' what was received by the Vendors so as to move the transfers to the Purchaser as stipulated in the Agreement ' : at [72].

190. Regard to the terms of the agreement led the majority to conclude that the consideration which moved the transfer was the whole of the purchase price as agreed (not the amount, net of the dividend, the payment of which was required to be funded by the Purchaser by loan to the company): at [75].

191. In the present case the issue is of a different character. There is no dispute between the parties that the extent of the monetary consideration which was to ' move ' under the terms of the EBAs was the agreed price per unit of concentrate. The issue concerns what moved that consideration. Was the amount of that consideration, when paid, just for the concentrate or was it paid, in part, for a licence to use the trade marks? The resolution of that question, in the manner in which the case was presented by the parties, turns upon the proper construction of the EBAs and the fact that they were performed by making payments to a Related Entity as Seller. It requires a conclusion to be reached as to whether, in those circumstances, the amount paid as the ' price ' was only for concentrate and did not include any component for use of the trade marks.

192. In Lend Lease the High Court was again concerned with a dutiable transaction. In the Court ' s reasons in that case it was emphasised that: ' The search is for " what was received by the [vendor] so as to move the transfers to the [purchaser] as stipulated in the Agreement " ' : at [51]. It concluded that the consideration for the land transfers that were in issue included promises of payment in the development agreement in performance of which those sales were effected and was not confined to the consideration expressed for the transfer. It was that additional consideration ' which moved each transfer ' : at [62]. The High Court reached that conclusion on the basis that the land sale contracts were made pursuant to a ' single, integrated and indivisible ' transaction as recorded in the development agreement: at [50]-[53].

193. For present purposes, I would draw two propositions from these authorities when it comes to determining the monetary consideration for a transaction or dealing recorded by agreement based upon its proper construction, namely:

• (1) it is first necessary to discern from the whole of the terms of the agreement the nature of the transaction or dealing that is provided for by the agreement; and
• (2) the monetary consideration is that which is actuating or moving the whole of that dealing or transaction.

194. Turning then to the present circumstances, the amounts that are required to be paid are specified as a price per unit of concentrate. There is an obligation on the part of the Bottler to buy its requirements of concentrate only from PepsiCo (or, as has been explained, a Related Entity). However, regard to the whole of the terms of the EBAs makes plain that it is not an agreement to supply concentrate. The nature of the transaction or dealing recorded in the agreement is one in which PepsiCo appoints the Bottler to bottle, distribute and sell branded beverages. It deals with the extent of the territory for that activity. By the EBAs, the Bottler secures the licence to be able to sell branded products to its customers. The only payment that it makes for that right is the per unit price for concentrate specified in the EBA.

195. Importantly, the trade marks are known to the parties to be strong and valuable. That is to say they have considerable existing goodwill. If the amount that is required to be paid under the EBAs is for the concentrate alone then the right to distribute the branded products is being afforded without any part of the monetary consideration being attributable to the licence to use the valuable brands of PepsiCo. That is a commercially unreasonable view of the terms of the EBAs considered as a whole.

196. Finally, the operative provision of the EBAs pursuant to which the concentrate is sold and bought is a provision that binds PepsiCo on the one hand and the Bottler on the other. True it is that it allows for the Seller to be either PepsiCo or a Related Entity nominated by PepsiCo as the party who will perform that obligation and receive the amounts to be paid, but there is no agreement by the Bottler with the Related Entity recorded in the EBAs. If the Bottler ceased buying concentrate during the term, it is PepsiCo that would have a claim. Similarly, if there was a failure to pay for concentrate, the terms of the EBA meant that PepsiCo could sue to require payment to be made because failure to pay the Related Entity would be a breach of the term of the EBA by which the Bottler agreed with PepsiCo to buy the concentrate. It may be that the Related Entity could also claim on the basis of terms voluntarily agreed as between the Bottler and the Related Entity (or on some restitutionary basis in the absence of such an agreement). However, when it comes to considering who is entitled to performance of the promise to pay the specified prices in the EBAs, it is PepsiCo that is entitled to performance of that provision.

197. In those circumstances, regard to the whole of the terms of the EBAs reveals that the prices to be paid under the terms of the EBAs are not simply consideration for the concentrate. Rather they are also consideration moving in favour of PepsiCo for the right to use the valuable brands that are conferred by the terms of the EBAs. They are properly construed as agreements to bottle, sell and distribute branded products, not as agreements for the supply of concentrate. It follows in my view 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.

198. The fact that the EBAs included a provision by which PepsiCo as the Seller could nominate a Related Entity to be the Seller does not alter the commercial character of the EBAs that is evident from a consideration of the whole of the terms of the agreements. Nor does the fact that in the manner in which the EBAs were performed a Related Entity was nominated as the Seller and the amounts provided for by the terms of the EBAs came to be paid to the Related Entity. Rather, the part of the price specified for concentrate, remained consideration for the use of the trade marks. Which is not to say that, when received by the Related Entity, it was received by that party as a royalty. The price as agreed between PepsiCo and the Bottler in the EBA could be in consideration (as to part) for the right to use the trade marks, but when an amount calculated in the same manner is paid to the nominated Related Entity as the supplier of the concentrate it could be in consideration for the concentrate. Nor is it to say that when received by the Related Entity in return for the supply of the concentrate that the monies in the hands of the Related Entity included an amount received for and on behalf of PepsiCo. As explained in the joint reasons, the Commissioner ' s case was silent as to any aspect of that kind. However, it does mean that part of the amount which was to be paid to the Related Entity as a consequence of the Related Entity being nominated by PepsiCo as the Seller for the purposes of performance of the obligation to sell concentrate under the terms of the EBA, was still an amount of money that was agreed to be paid by the Bottler partly in consideration for the use of the trade marks.

199. In
Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86 ; (2021) 286 FCR 437 , I was a member of a Full Court (with Allsop CJ and Anastassiou J) that reached a similar conclusion in respect of a different agreement for different statutory purposes. The issue in that case was whether an agreement was a franchise agreement for certain regulatory purposes. The agreement in that case was an agreement by which Freedom Foods was licensed by Blue Diamond Growers to manufacture and sell almond milk products using a name and trade marks owned by Blue Diamond Growers. The only payment to be made by Freedom Foods was for the almond base which was to be used to manufacture the products to be sold under the licensed names. There was no separate licence fee for the use of the name and trade marks.

200. Amongst other things, in order for the licence agreement to be a franchise agreement for the purposes of the regulation it had to provide for Blue Diamond Growers to grant the right to Freedom Foods to carry on the business of offering, supplying or distributing goods or services in Australia under a Blue Diamond Growers system or marketing plan.

201. In considering what was provided for by the agreement for the purposes of reaching a conclusion as to whether the above requirement was met, the following conclusion was reached as to the significance of the fact that the only price to be paid was a price for almond base supplied by Blue Diamond Growers to Freedom Foods (at [66]):

It may be inferred that the price that Blue Diamond was to charge Freedom Foods for the Almond Base was to include remuneration for the value of the brands (the value of which was to be further enhanced by the ongoing marketing expenditure to be incurred by Blue Diamond) or that there was no charge for the value of that intellectual property. The latter is such an unlikely commercial position that, in the absence of the Court being taken to evidence to the contrary, it may be inferred that the Almond Base price included remuneration not just for the supply of the Almond Base.

202. The above reasoning was undertaken in a very different context and provides no authority as to how to approach the present statutory task. Nevertheless, it does provide an example of a different factual circumstance in which the adopted method for calculation of the monetary consideration to be paid under an agreement (per unit of product sold) does not mean that the consideration is being paid solely for that product.

Does the ' exclusive royalty-free licence ' language in the EBA with SVC lead to a different conclusion concerning the royalty?

203. For reasons I have given, the fact that the EBA with SVC provided expressly that the grant of the right to use the trade marks was of ' an exclusive royalty-free licence to use ' cannot determine what the monetary consideration provided for by the EBA was ' for ' . The provisions of the EBA with SVC are otherwise not materially different (for present purposes) from the provisions of the EBA with PepsiCo. To label the grant of the right to use the trade marks as being given ' royalty-free ' could do no more than say that there was no monetary consideration beyond that which was provided for elsewhere in the EBA, namely in the form of a price per unit of concentrate. There remained the question whether any part of that amount when paid was paid ' as consideration for ' the use of the trade marks. For reasons that have been given, that amount was, in part, consideration for the use of the trade marks and was therefore a royalty to that extent.

Whether the amounts paid constituted income derived by PepsiCo and SVC?

204. As has been explained, in order for a liability to withholding tax to be imposed, the amount derived by a non-resident that consists of a royalty must also be income of PepsiCo or SVC as the case may be.

205. The trial judge concluded that the relevant portions of the amounts paid by the Bottler to the Related Entity were income derived by PepsiCo and SVC and were amounts to which they were beneficially entitled. His Honour said that this conclusion ' follows as a matter of contract from the fact that PepsiCo and SVC were the parties to the EBAs and [the Bottler ' s] payment obligations under the EBAs were owed to them ' : at TJ[255]. Respectfully, I do not accept that to be the case. As has been explained, if a Related Entity was nominated the Seller (as was the case) then the obligation to buy the concentrate from PepsiCo or SVC (as the case may be) became an obligation to buy from the Related Entity. Admittedly it was the case that the party entitled to enforce performance in that way remained PepsiCo or SVC. But the obligation became one which required the Bottler to buy from the Related Entity (and to make payment of the price per unit to that Related Entity). In effect, the nomination of the Related Entity as the Seller directed the benefit of the payment required by the EBAs to the Related Entity. Once the nomination was made, all of the amounts to be paid upon supply of the concentrate were owed to the Related Entity as the Seller. This position is reinforced by regard to the manner in which the supply of concentrate was actually effected by the Australian subsidiary as the Seller.

206. Therefore, it was not the case that the amounts that were paid by the Bottler to the Related Entity were ' owed ' to PepsiCo or SVC (as the case may be).

207. Respectfully, I agree with Perram and Jackman JJ for the reasons they give that the payments made by the Bottler received by the Related Entity did not result in the derivation of income by PepsiCo or SVC (as the case may be).

Conclusion as to withholding tax appeal

208. It follows from the conclusion as to derivation of income that PepsiCo and SVC have demonstrated that the trial judge was in error in concluding that the terms of s 128B(2B) were met in the circumstances of the present case. Their appeals must be upheld.

The diverted profits tax appeal

209. The relevant statutory provisions are carefully considered in the joint reasons of Perram and Jackman JJ. For the reasons there given, if I am wrong in my view that the amounts paid by the Bottler consisted of a royalty because they were paid as consideration for the use of the trade marks then, with respect, I agree that for the reasons expressed in the joint reasons, that the diverted profits appeal must fail.

210. However, there remains the issue whether the diverted profits tax appeal can and should be upheld on the basis of the conclusions I have reached to the effect that the EBAs provided for the payment of amounts that were, in part, as consideration for the use of the trade marks. On the conclusion I have reached, it is the mechanism by which the Related Entity could be nominated as the Seller (and be the party to whom payment would be made) that means that there is no income in the form of a royalty that may be the subject of a withholding tax liability on the part of PepsiCo or SVC (as the case may be). Therefore, on the conclusions I have reached in the context of the withholding tax appeal, different questions arise to those considered in the joint reasons.

211. The possibility that the scheme case may arise for consideration in the circumstances I have found was raised in the course of oral argument. Counsel for PepsiCo and SVC accepted that the scheme case would still need to be considered in such circumstances.

212. The schemes as alleged by the Commissioner are set out in the joint reasons. They allege, in effect, that by entering into the EBAs, PepsiCo and SVC appointed the Bottler to bottle, sell and distribute branded beverages on terms that required the purchase of concentrate and conferred the right to use the trade marks, but that they did so in circumstances where ' no royalty was paid ' for the licence to use the trade marks.

213. As to the relevant tax benefit that is required for the scheme provisions to apply and the operation of those provisions, I agree with the analysis in the joint reasons.

214. Much of the case advanced for PepsiCo (or SVC) as to why the trial judge was in error in finding (on the assumption that there was no withholding tax liability) that the diverted profits tax provisions applied involved submissions as to why the payment of monetary consideration by way of royalty for the licence to use the trade marks was not essential to the commercial character of the dealings with the Bottler. However, those submissions presumed a finding to the effect that in the EBAs there was no amount included in the price per unit of concentrate that was for the licence to use the trade marks. For reasons that have been given, I do not accept that premise. Therefore, in my respectful view, the application of the scheme provisions fall to be considered in respect of a transaction which includes an amount which is consideration for the use of the trade marks.

215. On the conclusion that I have reached concerning the royalty question, the EBAs resulted in a tax benefit because, if the EBAs had not been entered into, then a reasonable postulate was that the EBAs would have provided for the royalty to be paid to PepsiCo or SVC (as the case may be) as the holder of the rights to the trade mark.

216. The second of the reasonable alternatives advanced by the Commissioner as the basis for the contention that tax effects would have occurred if the scheme had not been entered into, was that the EBAs would have, or might reasonably be expected to have, expressly provided for the payments to be made by the Bottler to include a royalty for the use of the trade marks. Given that the claim made was that there was a diverted profits tax liability that would support the assessments that had been issued to PepsiCo and SVC, the postulate advanced by the Commissioner must refer to an express provision for a royalty to be paid to PepsiCo or SVC (as the case may be).

217. It follows that the reasonable postulate that I have described is consistent with the second of the alternatives advanced by the Commissioner. In any event, as the joint reasons explain, it is the burden of PepsiCo and SVC to prove that there was no reasonable alternative to entering into the scheme and for the reasons I have given they have not done so.

218. Therefore, it is necessary to consider the principal purpose of PepsiCo and SVC (as the case may be) in entering into and carrying out the scheme in order to determine whether the requirements of s 177J(1)(b) are met. As to the requirements to be met, I agree with the analysis in the joint reasons. Their Honours have undertaken their analysis of purpose on the basis of an assumption which equates to my findings. On that basis their Honours would have concluded that the requisite purpose would have been established. Respectfully, I agree with their analysis.

Conclusion as to diverted profits tax appeals

219. For those reasons, I would uphold the Commissioner ' s appeals.

Conclusion

220. For those reasons, I would join in the orders allowing the appeals by PepsiCo and SVC. However, I would allow the Commissioner ' s appeals. I would have heard from the parties on the question of costs, but as I am in a minority the appropriate order as to costs is properly determined by Perram and Jackman JJ.

THE COURT ORDERS THAT:

• 1. The parties provide a short minute of order to give effect to these reasons within 14 days.