Case note

When a payment for goods is not also a payment for the brand

PepsiCo, Inc v Commissioner of Taxation; Commissioner of Taxation v PepsiCo Inc (2024) 303 FCR 1; [2024] FCAFC 86; (2025) 99 ALJR 1211; [2025] HCA 30

Bottling agreements licensed the Pepsi and Gatorade brands to an Australian bottler and named no royalty. The Commissioner said part of what the bottler paid for concentrate was a royalty in substance. The High Court held that where an undisputed arm's length price is paid for goods, no part of it is consideration for the intellectual property that came with them.

Court

Full Court of the Federal Court, then the High Court of Australia

Bench

Perram, Colvin and Jackman JJ; then Gageler CJ, Gordon, Edelman, Steward, Gleeson, Jagot and Beech-Jones JJ

Decided

26 June 2024; 13 August 2025

Outcome

Taxpayers lost at first instance, succeeded in the Full Court, and the Commissioner's six appeals were dismissed with costs

The facts

Two United States companies owned the worldwide brand portfolios for Pepsi and Mountain Dew, and for Gatorade and Propel. The Australian counterparty was Schweppes Australia, owned by Asahi, which was the sole bottler and distributor of those drinks in Australia. It was not a member of the PepsiCo group: [2] Full Court, [117] High Court.

Two exclusive bottling agreements appointed the bottler to bottle, sell and distribute the beverages, and provided for concentrate to be sold to it at an agreed price per unit, indexed annually. One agreement contained no express licence and it was common ground that one had to be implied. The other granted an express licence and described it in terms as an exclusive royalty-free licence: [4] Full Court, [12], [14] High Court.

With the licence came a long list of obligations about how the product was to be made, stored, promoted and sold, and the brand owner's decision on any question about the trade marks was final: [13], [138] to [141] High Court.

The agreements let the brand owners nominate a group company as the seller of the concentrate, and they did. Purchase orders went to the nominated seller, which supplied and invoiced, and the bottler paid that company. The orders totalled around $240 million over the relevant period. Neither United States company ever held title to the concentrate: [26], [67], [134], [179] High Court.

What was in dispute

The Commissioner's primary case was that part of the price paid for the concentrate was in substance consideration for the right to use the intellectual property, and so a royalty bearing withholding tax. His alternative case was that the arrangement attracted the diverted profits tax.

The taxpayers lost both limbs at first instance, succeeded on appeal in the Full Court, and the Commissioner took six appeals to the High Court.

What the Court decided

All six appeals were dismissed with costs. The margins matter and are usually left out. On the royalty question the result was unanimous, but three of the seven Justices held that part of the price was a royalty and the taxpayers escaped only because no amount was derived by or paid to them. On the diverted profits tax the Court divided four to three, the minority having held that about $17.96 million was payable.

The majority accepted that the label does not govern. The phrase "consideration for" reaches the basis, purpose or condition for a transaction, and asks whether the promise to pay can be seen as the basis for, or a condition of, receiving the right to use the property.

The contractual price paid by SAPL to PBS for the concentrate was the price paid for goods sold and delivered. The Commissioner did not dispute that it 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.

Gordon, Edelman, Steward and Gleeson JJ at [174].

It follows that an amount may be consideration for the use of intellectual property so as to meet the definition of "royalty" without the amount itself being labelled as a "royalty", and indeed without an "amount" being specified at all, provided an amount can be "computed" to be an amount in money.

Gageler CJ, Jagot and Beech-Jones JJ, in the minority, at [44].

Reading those two passages together gives the shape of the decision. Nobody held that a payment escapes being a royalty because it is not called one. What the majority held is that this particular payment could not be dissected, because it was an undisputed arm's length price for goods actually sold and delivered.

The second reason the taxpayers succeeded was narrower still and had nothing to do with characterisation. The money was paid to the nominated seller and not to the brand owners, and neither brand owner ever held title to the concentrate. No amount was derived by or paid to them, which is what the withholding provisions require: [67], [179], [185].

One further point of housekeeping for anyone citing the case. The Full Court had reasoned by asking what the "central bargain" was. Both High Court judgments rejected that test: [42]. It should not be quoted as good law.

Why the decision matters

The decision is the leading Australian authority on when a payment that is not described as a royalty is nonetheless consideration for the use of intellectual property. The principle it settles cuts against taxpayers: the label is irrelevant, no amount needs to be specified, and a single payment can in principle be dissected.

The reason this taxpayer won is a set of facts, and they should be listed rather than summarised. The counterparty was unrelated. The price was an arm's length price for goods, and the Commissioner never argued it was inflated or disproportionate. And the money went to an entity that was not the owner of the intellectual property, so the owners derived nothing.

That combination is unusual, and it is worth noticing how much of it an intra-group arrangement would lack. A parent invoicing its own subsidiary is not dealing with an unrelated party, so the price is exactly what is open to challenge rather than common ground, and the payment usually goes to the owner of the brand. Read as reassurance for a group paying a bundled fee to its parent, the case gives very little.

The practical question the decision leaves is therefore the one it did not have to answer: what part of a payment is for the goods or services and what part is for the right to use the brand or the know-how. Where that question is answered in the documents at the time, and answered on a defensible basis, it does not have to be argued a decade later. In this litigation it took three hearings over more than two years, and three of seven Justices would have answered it against the taxpayer.

Where it stands

The High Court decision stands and is the current law. It is already being applied, including in later Full Court and Federal Court decisions.

Two cautions for anyone using the case. The Full Court's reasoning was displaced in part even though the outcome was upheld, so the Full Court's "central bargain" analysis is not authority. And the rate of the diverted profits tax is stated inconsistently in the Full Court's own reasons; it is 40 per cent.

The proposition sometimes drawn from this case, that the taxpayers succeeded because their documents matched what they actually did, should be treated carefully. There is a finding to that effect, but it sits in a part of the reasons the majority described as unnecessary to the outcome: [232]. The operative reasons were the construction of "consideration for", the absence of any antecedent monetary obligation, and the absence of a reasonable alternative postulate.

A case note by Boettcher Law. It is general information about Australian law and a summary of two published decisions, and it is not legal advice on any particular arrangement. Paragraph references are to the High Court's reasons unless the text says otherwise.