Commissioner of Taxation v PepsiCo, Inc.; Commissioner of Taxation v Stokely-Van Camp, Inc

[2025] HCATrans 25

[2025] HCATrans 025

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M98 of 2024
  Melbourne  No M100 of 2024
  Melbourne  No M101 of 2024

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

PEPSICO, INC.

Respondent

Office of the Registry
  Melbourne  No M99 of 2024
  Melbourne  No M102 of 2024
  Melbourne  No M103 of 2024

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

STOKELY-VAN CAMP, INC.

Respondent

GAGELER CJ
GORDON J
EDELMAN J
STEWARD J
GLEESON J
JAGOT J
BEECH‑JONES J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 3 APRIL 2025, AT 10.00 AM

(Continued from 2/4/25)

Copyright in the High Court of Australia

____________________

GAGELER CJ:   The transcript will record that Justice Jagot is participating in the hearing remotely from Sydney.  Ms Deards.

MS DEARDS:   May it please the Court.  I will address the Court on the two purpose factors that I foreshadowed yesterday, the first being “manner”, which is:

the manner in which the scheme was entered into or carried out –

which is a factor raised by section 177D(2)(a) in the 1936 Act.  As identified in our reply in paragraphs 28 to 29, the focus is on the time of entry into the scheme, and here, the scheme was entered into in April 2009 when the PepsiCo and SVC EBAs with SAPL were executed.

Those 2009 EBAs, which were wholly restated, and amended the previous bottling agreements that had been entered into in the year 2000 between a Cadbury Schweppes Group bottler and Pepsi Group – your Honours will see a reference to that in paragraph 41 to 42 of the trial judge’s reasons.  The entry into

the 2009 EBAs occurred just after the Cadbury Schweppes Group was acquired by the Asahi Group, that was the occasion for entry into a new series of EBAs.  There was no evidence about when EBAs were first used in Australia.  So, prior to 2000, there is a black box in respect of the evidence.

The respondents identify the manner of entry into the 2009 EBAs by reference to what they claim is a long history of similar EBAs being entered into elsewhere in the PepsiCo Group.  The primary judge thought that the taxpayer’s invocation of history supported them on purpose, “but only slightly”.  If I can take your Honours to paragraph 452 of the trial judge’s reasons, reading from that paragraph, from the fourth sentence, the trial judge said that:

The PepsiCo parties submit that these matters point strongly against PepsiCo/SVC having a principal purpose as described in s 177J(1)(b).  I accept that these matters point, to some extent, against the presence of a principal purpose as described in s 177J(1)(b).  However, in my opinion, they do not take matters very far.  There is no detailed and comprehensive evidence as to why, as at 2009, the PepsiCo Group generally adopted that pricing structure in its exclusive bottling agreements (or, for that matter, why some others in the beverage industry also adopted that structure).  It would not be safe to assume that tax considerations did not have a role to play.  Insofar as Mr Williams gave evidence that the pricing model was adopted because it was “simple”, I have difficulties with that evidence.  The sample exclusive bottling agreements in evidence show that there was considerable complexity in the pricing terms in some agreements.  I therefore consider that this matter supports the PepsiCo parties’ position on purpose, but only slightly.

So, his Honour found that, without an explanation as to why the EBA payment structure was adopted in 2009 or, I might add, at any point in history or in any country, it “would not be safe to assume” that tax considerations had no role to play.

STEWARD J:   Is that a reference to subjective or objective purpose?

MS DEARDS:   This is a reference to objective purpose.

STEWARD J:   And we know that because?

MS DEARDS:   What his Honour is doing here is highlighting the fact that, apart from the history, there was no apparent commercial reason on any of the evidence, your Honour, apart from the affidavit evidence given by the witnesses, there were no other reasons apart from the history being put forward to identify why the pricing structure was the way that it was.

EDELMAN J:   The tax benefit was around [X], is that right?

MS DEARDS:   The quantum of the tax benefit in total, for both of the taxpayers, across the two years in which they have been assessed, is [X].

BEECH-JONES J:   When you say “tax benefit”, is that the gross amount of the royalty?

MS DEARDS:   It is the gross amount of the royalty, because that is the way that the provisions identify the tax benefit, not the tax.

STEWARD J:   It is five per cent on that, though.

MS DEARDS:   Five per cent on that would be the royalty withholding tax.

STEWARD J:   Yes.

MS DEARDS:   And if your Honours found that there was no royalty withholding tax but did find that the DPT applied, then the [X] would be multiplied by 40 per cent, because that is the tax rate that applies for DPT.

EDELMAN J:   Putting aside the DPT, there is an effective tax gain, if I can put it that way, of around [X], in the context of what is the size of the transaction.

MS DEARDS:   I think there were concentrate payments over the period of time of around [X], I think – this is the number that springs to mind, but I will check that for your Honour, yes.

GORDON J:   That is why it gave rise to the return, on the [X], of only 0.0 per cent, that you took us to yesterday.

MS DEARDS:   No, your Honour.  I think that is the return that PBS makes on its buying and selling.

GORDON J:   I see, thank you.

MS DEARDS:   Yes.  So, presumably for transfer pricing reasons, someone has come to a view that that is the appropriate margin, and I took your Honour yesterday to the ‑ ‑ ‑

GORDON J:   There is no suggestion, though, that price for the concentrate was anything but the right price?

MS DEARDS:   There is no suggestion by the Commissioner that the price under the EBA – that the total payment under the EBA was not an appropriate price for everything that passed under the EBA.

BEECH-JONES J:   Just at the trial, was there put into evidence all the back and forth between Schweppes and PepsiCo about how the agreement came about?

MS DEARDS:   No, your Honour.  There is a memorandum that the Full Court referred to.

BEECH-JONES J:   I saw that.

MS DEARDS:   But aside from that, no.  None of the witnesses who had been called had been around at that time.

BEECH-JONES J:   But the communications were not put in place, either?

MS DEARDS:   No.  The memorandum – I could be corrected on that, but I think the memorandum was the only material that was available in relation to the manner of entry into the scheme.  Your Honour, the majority in the Full Court also regarded the assumption that tax considerations had no role to play to be unsafe, in dealing with the manner factor, and came to the conclusion that it could only be regarded as neutral and did not even slightly favour the taxpayers in the purpose analysis.  So, they took a slightly different approach to the trial judge.

Their Honours referred at – and I will just give your Honours the references – paragraphs 129 to 131 of their Honours’ reasons to the original Income Tax Assessment Act1936, which was enacted before the introduction of the global FOBO model in the 1950s.  We note that their Honours acknowledge, in paragraph 132 that there is no evidence about when the FOBO model was first introduced into Australia.

But the statutory task, here, your Honours, is to assess the purpose of entering into this scheme, which occurred in 2009, with the execution of the EBAs.  By then, section 128B(2)(b) – which was enacted in 1992 – had been introduced.  So, your Honours, in my submission, resort to history and the FOBO model does not advance the taxpayer’s purpose arguments in respect of the manner factor.

Your Honours, turning now to the second factor, “form and substance of the scheme”, which arises under section 177D(2)(b).  This is the weightiest factor in the purpose inquiry, from the Commissioner’s perspective, in this case.  The primary judge found that the disconnect between form and substance strongly supports the Commissioner’s position.

As I said yesterday, in the context of tax benefit, the commercial substance of the actual EBAs – the scheme – was that SAPL received from the PepsiCo Group concentrate and the highly valuable intellectual property, both of which it needed to bottle and sell branded beverages, and SAPL paid an amount of money to the PepsiCo Group.  That is what the Commissioner identifies as being the substance of the arrangement.

STEWARD J:   Did you take issue with the proposition that it was in Pepsi’s interest for that intellectual property to be deployed and used by Schweppes so that Pepsi’s own, ultimate profits would be improved as a group?

MS DEARDS:   As a matter of logic, that may well be so.  There is no evidence that was put on by either of the experts to analyse the extent to which that was the case.

STEWARD J:   Your case is that the brands are critical in order to sell the Pepsi‑Cola and the other drinks.

MS DEARDS:   Yes.

STEWARD J:   But it is critical for both Schweppes and Pepsi – I mean, if Pepsi did not grant intellectual property to Schweppes, Schweppes’ capacity to sell Pepsi‑Cola would be greatly diminished, and so it is of benefit to both, surely.

MS DEARDS:   Yes, it benefits both of them, that is true, because Pepsi benefits through the concentrate sales.

STEWARD J:   Greater sales.

MS DEARDS:   Yes.

STEWARD J:   Greater market share and so on.

MS DEARDS:   Greater sales, yes, that is how it makes money, from the sale of Pepsi beverages, indirectly, in Australia, through the concentrate sales.

STEWARD J:   All right.

GLEESON J:   So, in that way, you are not maintaining the submission that you made in the court below that is recorded by the majority at paragraph 21, that PepsiCo was:

giving away the right to use the trade marks for nothing unless –

the concentrate price embedded some value for the IP?

MS DEARDS:   My submission below was that it was giving it away for no monetary consideration.

GLEESON J:   Are you saying that the majority misrecorded the submission?

MS DEARDS:   It is not a technically accurate ‑ ‑ ‑

GLEESON J:   But if you had made that submission, you would not be pressing it now?

MS DEARDS:   Yes, that is right, your Honour, yes.  I accept that it may be possible – and I have not gone over the transcript – that I may have put it in those terms.  But, certainly, the Commissioner’s case has always been that the commercial circumstances surrounding the arrangements, notwithstanding the fact that there may be a number of burdens and benefits flowing to both parties under the arrangements, is that it would be commercially questionable, in the sense that it raises an issue about the substance and form of the arrangements, for the Pepsi Group being regarded as giving away the use of their intellectual property for no monetary consideration.

GORDON J:   Does it matter who provides the IP, in the sense of whether or not it is by specification or whether or not it is provided to Schweppes in Australia?  I ask that question because, as I read it, they are treated differently under each of the EBAs.  So, under the first EBA, the specifications are given to Schweppes and Schweppes then put it together; but under the Gatorade one, it seems, as I read it, that the Pepsi entity provides all the packaging.  Does that matter?

MS DEARDS:   No, your Honour, I do not think so.  I am not sure that we have evidence about how that was actually performed in practice, in terms of the packaging.  They were described in the various affidavits, as far as I recall, as being conducted in the same way, and my understanding is that they were provided with specifications.  There were a number of very large manuals that were in evidence, in the evidence of Mr Lovorn and in the tender bundle identifying the instructions as to how to produce the beverages, how to troubleshoot, how to train people to undertake the various roles that they would need to undertake in order to produce the beverages.

Your Honours, returning to substance and form, in substance, the actual EBAs involve significant value moving from Pepsi and SVC to SAPL by way of licence of valuable intellectual property.  The form of the EBAs is that they express the payment made by SAPL to be in relation to concentrate only, and so the Commissioner submits that there is a substantial disparity between the form of the scheme and its substance, and that disparity leads one to ask why the EBAs have the form that they do.

In the Commissioner’s submission, there is no commercial reason why the SAPL payment has been allocated to concentrate only.  The taxpayer said that the commercial reason for this was that Pepsi had a FOBO model and had a long history of doing it that way.  But for the reasons that I have identified in relation to manner, the history of that model was not explained, so that just pushes the question further back in time.  That is, the fact that the model had been around for a long time just begs the question of why it was that way and why it had been around for a long time.

The Commissioner’s postulates align the commercial substance of the transaction.  That is, the provision of concentrate and valuable IP to SAPL, with the legal form of the agreements, and they do so without inflicting any violence at all on the commercial imperatives of the EBAs.  This had an influence on the way that the trial judge thought about purpose, and that can be seen at paragraph 465 of the trial judge’s reasons.  In the last sentence of that paragraph, his Honour concluded:

I consider that the terms of the EBAs are contrived, in that payments that are ostensibly for concentrate alone are in substance for both concentrate and the licence of valuable intellectual property.

Your Honours, this finding of contrivance comes from a comparison of form and substance.  We would add that the disconnect between the form and substance of the EBAs is underscored by the fact that the form and substance can be aligned so easily in the counterfactuals with just a small textual change to the bottling agreements, without giving rise to any difference in terms of the results and consequences of the scheme.

In respect of the other matters, the other factors, I rely on my written submissions, but I note that all of them were regarded by the four judges below to be either neutral or to weigh in favour of the Commissioner.

May it please the Court.

EDELMAN J:   Just before you sit down, can I just confirm – if you are right about the first and second grounds, one does not get, on your submissions, to the DPT tax benefits question?

MS DEARDS:   That is correct.

EDELMAN J:   That only arises if you are wrong about the first grounds?

MS DEARDS:   Yes, it is a true alternative case, your Honour.

EDELMAN J:   Thank you.

MS DEARDS:   May it please the Court.

GAGELER CJ:   Thank you.  Mr Wheelahan.

MR WHEELAHAN:   Your Honours, in accordance with the outline of oral submissions, I intend to start by spending a bit of time describing the PepsiCo Group’s business model as instantiated by the EBAs.  I will then address the test under section 128B, and I will deal first, with the requirements for payment and derivation, and then with the definition of royalty.  Finally, I will address the diverted profits tax case in the order of tax benefit and then purpose.  I think that I will end up being closer to the three hour estimate; that end of the range that I gave yesterday.

Your Honours, since the early 1900s, the PepsiCo Group has operated under a business model whereby it enters into exclusive bottling appointments with local distributors which bottle, market and sell its beverages in a territory.  Under the model, the bottler purchases beverage concentrate manufactured by the PepsiCo Group using its highly‑guarded and valuable beverage formulations, and converts it into finished product through what is known as a “cold fill” process.  The cold fill process was likened, in the evidence:

to baking a cake using store‑bought cake mix –

And if I could take your Honours to the trial judge’s reasons at paragraph 135, which is page 50 of the book, your Honours will see that appearing in the second half of the first sentence.  Then there is an extract from cross‑examination of Mr Lovorn, who was the general manager of PepsiCo Global Concentrate Solutions division, which was the division that manufactured the concentrate for the international market.  Mr Lovorn said:

We provide the ingredient; we provide the proprietary formulations; we work with the suppliers in qualifying ingredients that buy from our qualified suppliers.  So the general manufacturing operation in a cold fill plant is a batch system, a bowl where they mix the ingredients, a filling system where they pour it into a bottle and then they cap it, or put it in a can, and seal it.

Over the page, his Honour accepted that evidence and Mr Lovorn’s affidavit evidence on the topic.

GAGELER CJ:   So, if you wanted to use that analogy, you would have to add, following a recipe, would you not?

MR WHEELAHAN:   That is correct.  Yes, your Honour, following the recipe.  The point is that it is a “standardised and a well known” basic process – that appears in paragraph 138 – and that:

It is easy to buy the required equipment –

And that:

The complexity and expense involved in the manufacture of concentrate are avoided for the bottler –

it does not need to engage in those complex manufacturing processes, and the PepsiCo Group:

manages the complexities of the supply chain for the unique ingredients –

Your Honours, this bottling function is carried out under the PepsiCo Group strict quality controls.  Could I take your Honours, now, to the PepsiCo EBA by way of example, which is behind tab 1 of the appellant’s book of further materials.  Beginning at clause 6 on page 10, your Honours will see that the bottler is required to:

follow all instructions and directions issued by Seller from time to time for preparing and bottling Beverages –

In clause 7, the bottler must:

use only the Units purchased from Seller and the packaging specified by Company –

and that the seller shall provide the bottler with:

specifications on all other materials required . . . Bottler shall only use those materials . . . which comply with such specifications –

Then, in clause 9, the bottler is required to maintain the plant:

in a thoroughly clean and sanitary condition.

And operate the plant according to all municipal and local laws, and to:

filter all water used –

in the bottling process.  Clause 13 requires the bottler to provide samples to the company.  Clause 14 gives the company rights of inspection over the plant.  Clause 15 requires the bottler to complete tests and provide or furnish test records as required.  The bottler is also required to invest in the plant and equipment.  And your Honours will see that in clause 8:

Bottler will maintain and operate one in the Territory or more bottling plants, properly and adequately equipped –

Joining that to subparagraph (b), that are sufficient to maintain the production capacity for the territory.  Under clause 12, the bottler is also required to invest capital and such expenditure as necessary in inventory, “bottles, cartons, containers” and the like.

So, your Honours, those obligations can be seen to relate to the bottling function whereby the concentrate is converted into the finished product.  Can I turn, now, to the other important function of the bottler.

EDELMAN J:   Is this going to a submission that this would be a reason why there is no monetary consideration paid for not just getting any ordinary concentrate, but getting PepsiCo concentrate?

MR WHEELAHAN:   That is part of it.  It is certainly getting the PepsiCo concentrate, but it is also what PepsiCo is getting back from the bottler.  So, my learned friend has tried to characterise the substance of this arrangement as a provision of concentrate, a provision of IP and then a payment coming back from SAPL, and that is how the whole case seems to be presented.  It is far more complex than that.

There is a whole bunch of interlocking promises, here, and there are many benefits derived by PepsiCo under this arrangement, which would lead one not to conclude that it ought to be charging a royalty for the provision of the IP.  And I will come to that aspect of it right now, which is what the bottler does with the intellectual property, and especially the trademarks, in terms of building the brand in Australia.  Could I take your Honours to clause 8.

GORDON J:   This is clause 8 of which agreement?

MR WHEELAHAN:   Of the same agreement.  I withdraw that, I will take your Honours to clause 11(e), which is a critical clause.  Your Honours will see that the bottler is required to:

use its reasonable endeavours to maximise the sale of Beverages throughout the Territory . . . to fully meet and increase the demand and share of the market for Beverages throughout the Territory and secure full distribution up to the maximum sales potential therein through all distribution channels or outlets . . . using any and all equipment reasonably necessary . . . fully exploit new packages, new package sizes and new Beverage opportunities . . . use its own salesmen and trucks . . . cooperate in Company’s cooperative advertising and sales promotion programs and campaigns for the Territory.

I will come to that in more detail in a moment.  The next clause I will direct your Honours to is clause 18:

Bottler will actively advertise Beverages and vigorously engage in sales promotion activities for the Beverages in the Territory.

And:

enter into a –

what has been referred to as the co-op agreements, they deal with advertising and marketing and which will govern matters relating to advertising and marketing.  The performance agreement also deals with those matters, which is referred to in clause 19, which is an agreement entered into between the bottler – well, at the time of signing, this had already been entered into with Pepsi-Cola International, Cork, PCIC.  Just so your Honours are aware, that entity sat in the position of PBS at the time of entry into this agreement, so it was the nominated seller of the concentrate at this point in time.

STEWARD J:   Can I ask, Mr Wheelahan, the obligation in 18 to actively advertise, is that at the cost of SAPL?

MR WHEELAHAN:   I will come to the co‑op agreement in a moment, but they jointly ‑ ‑ ‑

STEWARD J:   They jointly share it?

MR WHEELAHAN:   They share the expenditure for those campaigns.  I will come to that shortly.

BEECH-JONES J:   So, what we get out of this is that PepsiCo got the benefit of promises that it would build the market and build its brand?

MR WHEELAHAN:   That is right.

STEWARD J:   With – and you will come to it – the costs being shared?

MR WHEELAHAN:   With costs being shared, yes, your Honour.  Your Honours, whilst they are obliged to carry out these activities and invest money in them, they do not get any interest in the brand, and we will see that from clause 5(d).

GORDON J:   Who is “they”, in that context?

MR WHEELAHAN:   Sorry, your Honour, they – SAPL – the bottler does not get any interest in the brand.  I just direct your Honours to clause 5(d).  Your Honours, SAPL’s advertising and promotional activities are, once again, under PepsiCo’s strict instructions and direction.  Could I take your Honours first to clause 17(a).  Your Honours will see that the bottler must:

sell and distribute –

and:

make only such representations concerning Beverages as shall have been previously authorised in writing by Company.

Clause 20, on page 14, provides that the

Bottler will use only such advertising strategies for Beverages as Company may develop for that market . . . will use only advertising and promotion materials furnished or caused to be furnished by Company . . . and to the extent of any of Company’s Trade marks . . . will not advertise the Beverages in or through media or engage in promotions of the Beverages, not approved by Company in writing –

GORDON J:   In relation to clause 17, at paragraph 57 of the primary judge, it is said it was common ground that the effect of this clause and the agreement generally was an implied licence to SAPL to use the relevant trademarks and IP.

MR WHEELAHAN:   Yes, your Honour.

GORDON J:   Is that still the position?

MR WHEELAHAN:   Yes, we accept there is an implied licence under this agreement – perhaps not just under that clause, there is a multitude of clauses that could be read as implying the ‑ ‑ ‑

GORDON J:   I think it says this clause “and the agreement generally”.

MR WHEELAHAN:   Yes, your Honour.  Finally, on that topic of control over the marketing activities, I direct your Honours to clauses 5(b):

The decision of Company on all matters concerning the Trade marks shall be final and conclusive on, and not subject to question by, Bottler.

And (c):

Bottler recognises Company’s ownership of the Trade marks and will not take any action which will prejudice –

that ownership.

GAGELER CJ:   Mr Wheelahan, I realise we are going carefully through one of the EBAs, and you may be going to take us to the other, but do you draw any distinction, for any part of your argument, between the two EBAs here?

MR WHEELAHAN:   Not on this topic.  So, a difference is that the co‑op agreements and the performance agreements that I will come to – which relate to PepsiCo – are not contained in separate agreements for SVC.  They are built into the EBA.  You can see that in the definitions, and there is a schedule.  So, that is a difference in form.  But you can find roughly equivalent clauses to the ones that I have directed the Court to in the SVC EBA.

GORDON J:   But the one that was identified yesterday as a difference by Ms Deards is the clause in the SVC – which I am sure you are going to come to – which was the one identified by the primary judge at paragraph 215.

MR WHEELAHAN:   The payment clause?

GORDON J:   Yes.

MR WHEELAHAN:   Yes, I will take the Court through each of the clauses that are relied upon by the Commissioner in relation to payment.

GORDON J:   Thank you.

MR WHEELAHAN:   Could I turn now to some of the findings of the trial judge, which supply some of the detail of the cooperative brand building, commencing with paragraph 186 of his Honour’s reasons.  His Honour accepted the evidence of Mr Williams that:

brand building under the FOBO model involves the development of the brand strategy and then the implementation of that strategy through programs involving sponsorship deals, advertising campaigns and communication strategies; this marketing program is then split into two areas, known as “push” and “pull” –

Your Honors, those expressions are explained in paragraph 74, where Mr Williams explained that “pull” – and I should say that “pull” is also referred to as “Above‑the‑Line”, so your Honours will see in that same paragraph there is a reference to “Above‑the‑Line” or “ATL”.

“Pull” is generally that part of the marketing program that is allocated to the PepsiCo side, and it involves, for example, the TV advertising, the sponsorship, those sorts of things, whereas “push” is generally allocated to the bottler side and it involves pushing the product out into the stores, advertising in the stores, coolers, fridges, displays on the end of the aisles, those sorts of things.  Could I now take your Honours to paragraph 188 of his Honour’s reasons.  The trial judge accepted the evidence of Mr Williams that the:

PepsiCo Group’s Franchise Team tries to simplify, based on those best practices, a model and what they call levers that markets can execute to build the brands –

Those levers are, again, on the “pull” side and on the “push” side.  So, on the “push” side, the levers are, for example:

pricing, display, availability and store presence.

At paragraph 165 ‑ ‑ ‑

BEECH-JONES J:   So, the PepsiCo Group’s franchise team is part of your client’s, it is not part of SAPL?

MR WHEELAHAN:   Yes, your Honour.  That is an internal – that is right.   I will come in a moment, though, to the findings that explain that that team works with the bottler.

BEECH-JONES J:   Yes.  Sorry, you were taking us to a paragraph?

MR WHEELAHAN:   Yes, paragraph 165.  Again, the trial judge accepted Mr Williams’ evidence, which is extracted in that paragraph, where it was asked of Mr Williams whether:

it’s the global brand of Pepsi that drives the volume of beverage sales and market share?

Mr Williams said:

No, it’s a multiple group of things that drive volume and market share.

And:

We would typically look at everything across what we call push-pull.  So everything that involves the brand in a store, so pricing, display, location in the store and trade promotions, so we would regard that as push.

So, your Honours, as I mentioned, those are the things that are generally allocated to the bottler.  So, your Honours, whilst PepsiCo is primarily responsible for developing brand strategy, SAPL plays an important role in its execution.  And as I just mentioned, they work cooperatively on building the brand.  If I could take your Honours to paragraph 190 of the trial judge’s reasons.

GLEESON J:   Mr Wheelahan, did the primary judge find that the FOBO model was a thing?

MR WHEELAHAN:   Yes, he did.  He said he accepted that as a general proposition, but noted that it can be subject to variance, or I think significant variation in its terms.  And I will come to that as well, your Honour.  But he referred specifically to pricing and the pricing mechanisms.  I will address that.  It is paragraph 169, your Honour, and paragraph 167.

Your Honours, I was about to address the cooperative nature of these activities.  At paragraph 190, the trial judge recorded that:

the PepsiCo Group has been trying to build its brand across many countries –

and:

to create synergy . . . This is achieved by making sure there are joint commitments by both the PepsiCo Group and the bottler to shared marketing responsibilities, where local marketing initiatives are influenced by local marketing managers in consultation with bottlers to ensure that the initiatives are locally relevant –

et cetera.  And in paragraph 192, beginning midway:

they must get their bottlers to support that campaign, because the bottler is (generally) funding some portion of the local spending on the brand advertising.

And that it is:

in the interest of maintaining a collaborative relationship with the bottler –

that they do not run an ad campaign:

without first consulting the bottler about it.

Could I turn now, your Honours, to the performance agreement, which is behind page 149 of the respondents’ book of further materials. 

GORDON J:   Can I just ask you, before you leave that – I misspoke earlier.  In the actual annual Co‑operative Marketing Agreement, we were taken yesterday to a provision which says that the bottler acknowledges that its contributions are for the purpose of improving its sales of the beverages, not for building the brands.

MR WHEELAHAN:   Yes, your Honour.

GORDON J:   Are you going to address that?

MR WHEELAHAN:   Yes.  I could address it now, if you like.

GORDON J:   At a time convenient to you, Mr Wheelahan.

MR WHEELAHAN:   I was going to come to it – I might as well address it now.  It is, we say, a lawyer’s clause, and it really ties in with that clause 5(d) that we saw, or perhaps (e) ‑ ‑ ‑

GORDON J:   Of the EBA?

MR WHEELAHAN:   ‑ ‑ ‑ of the EBA, to protect PepsiCo.  We would say that the presence of that clause, really, is in anticipation that it might be said that what they are doing is doing precisely that – creating interest in the brand, because they are building the brand.  So, what that clause does – you cannot contract out of the facts, and the fact is that they are building the brand, and in re‑examination, Mr Williams was asked – in relation to that clause, notwithstanding what the clause says – does the bottler build the brand?  And he said, yes, it does.  That is at paragraph 215.

So, we say what it does is alter the legal consequences; it does not change the facts.  What we are dealing with, here, are – well, our submissions are directed to the legal consequences of these arrangements and the benefits that Pepsi enjoys from the activities carried out by the bottler.  I should note also that that clause was introduced in 2017, so it was not in those co‑op agreements up until a later part of the period, and so in that respect, it is irrelevant to, at least, the DPT – the diverted profits tax – part of the case, because we are looking at entry into the scheme in 2009.

GORDON J:   Thank you.

MR WHEELAHAN:   Your Honours, turning to the performance agreement, your Honours can see, as I mentioned, this is between PCIC, which at that time stood in the position of PBS, and it states in the introduction that:

This Agreement is the Performance Agreement referred to in the EBA.

Its term corresponds with the term of the EBA.  It does two things in the next section; it sets minimum annual sales volumes and also target sales volumes.

BEECH‑JONES J:   What are the pages, again, did you say?

STEWARD J:   At 149.

BEECH‑JONES J:   Page 149.

MR WHEELAHAN:   Yes, and I am on page 150 right now.  So, it sets minimum sales volumes and target sales volumes.  It sets them for the initial periods – so, up to 2012 – and then provides that from then on, the co‑op agreements will govern these targets.  There are some clauses in there that require the parties to negotiate “in good faith” for those Co‑op arrangements.  And there is an “expectation” of the parties, referred to in clause 3.2, that there will be:

annual volume growth –

consistent with the general growth of the market, and an aim or “horizon target” to obtain:

a 25% share of all channel cola volume.

Then the next section, section 5, deals with ‑ ‑ ‑ 

BEECH‑JONES J:   Mr Wheelahan, I am sorry to ask, is any part of those – that number you have just – that is not confidential, is it?  Just take it on.

MR WHEELAHAN:   It is not blacked out on mine, but I am ‑ ‑ ‑ 

BEECH‑JONES J:   Yes, all right.  So, if it is not ‑ ‑ ‑ 

MR WHEELAHAN:   I will try and avoid using numbers.  Thank you, your Honour.

BEECH‑JONES J:   Yes – so, generally, if it is blacked out, it is meant to be confidential, is that right?

MR WHEELAHAN:   Yes, your Honour.  The next section deals with various other targets, like trying to get the products out into a sufficient number of outlets, so “non‑grocery outlets”.  There are targets about the number of coolers and fridges that the bottler should get into those outlets.  Then section 7 deals with “Marketing and Advertising”, and clause 7.1 refers to:

Guidelines in Schedule 3 –

which:

set out the respective roles of PCIC and Bottler to undertake advertising, marketing and promotional activities –

I will quickly flick to those, if your Honours would not mind, it is on page 162.  Without going through them in detail, your Honours can see the allocation where it says – there is a column “Responsibility” and BTL is below the line, ATL is above the line, and you can see various activities are allocated either to the bottler or to the PepsiCo, or PCIC.  Clause 7.2, provides that:

Each Co‑op A&M Agreement will outline an annual advertising and marketing expenditure program designed to sustain and grow the volume of Beverages and will provide for and record –

Again, the “targets” and “innovation commitments”.  Clause 7.3 is a very complicated set of numbers which relate to a fund, effectively, that is created and in respect of which certain amounts are allocated to above the line, below the line and some amounts are paid back to the bottler by way of rebate if it achieves certain targets.  Clause 7.4 again refers to entry into later co-op agreements:

to sustain and grow the volume of Beverages –

In clause 7.6 the bottler agrees to:

specific innovation commitments for each calendar
year –

Both parties do, I should say:

in respect of time, effort and resources for the development and execution of product innovations consistent with achieving volume growth and share objectives.

And:

use commercially reasonable endeavours to support –

those projects, et cetera.  The final clause I wanted to draw to your Honours’ attention is clause 8.1, which gives both parties a right of termination for breach of this agreement so that if, for example, the bottler fails to reach minimum targets, it could potentially give rise to a right of termination, and then the clause that we saw in the EBA referring to this agreement provided that termination of this agreement gives the PepsiCo Group a right to terminate the EBA itself.

GORDON J:   Is that consistent with the opening recitals, which is that they are to be read as one agreement, but the EBA prevails?

MR WHEELAHAN:   Yes, your Honour.

GORDON J:   Or is there no inconsistency?

MR WHEELAHAN:   There are clauses like that that we find through these agreements, that create privity problems, and it seems that the drafters of these agreement perhaps had not turned their minds to those privity problems.  Obviously, this is the agreement between the bottler and PCIC and not between the bottler and PepsiCo, but ‑ ‑ ‑

GORDON J:   So, this is – now, it is an agreement between PBS and the bottler?

MR WHEELAHAN:   Well, technically, this agreement has not – it is still lying around, but it has been superseded functionally by the later co-op agreements which were entered into by PBS and the bottler ‑ ‑ ‑

GORDON J:   I see, thank you.

MR WHEELAHAN:   ‑ ‑ ‑ as well as, I think, PAH which is a service company of PBS.  Yes, and they are entered into annually.

STEWARD J:   You will take us to one of those?

MR WHEELAHAN:   One of those is the one that had the clause 16 that was handed up yesterday.

EDELMAN J:   Is it 2017?

MR WHEELAHAN:   Yes, your Honour.

STEWARD J:   So, was that applicable during the years of income in issue, or was it again superseded?

MR WHEELAHAN:   No, it would have crossed over into the first of the years of income that we are concerned with.

STEWARD J:   Okay.

MR WHEELAHAN:   Your Honours, the trial judge accepted Mr Williams’ evidence that the:

model drives value for both the bottler and the PepsiCo Group –

and we see that at paragraph 167, if I could ask your Honours to turn to that.  Mr Williams’ evidence, which the trial judge accepted, was that:

on the bottler’s side, it will earn a higher return on capital . . . than PepsiCo would because of the bottler’s knowledge of the local market and ability to leverage its networks –

et cetera, and it:

is able to leverage the PepsiCo Group’s innovation and marketing capabilities which enhances the bottler’s own local capabilities.

And then, in respect of the PepsiCo side, which is in paragraph 168:

the group gains access to the bottler’s investment in bottling and distribution equipment and its capabilities, including its distribution network, sales force, leadership, relationships with the trade (such as supermarket executives) and local regulatory authorities; it is beneficial for the PepsiCo Group to do this, as it does not have those local capabilities or assets.

And that is reflected in paragraph 3 of our outline of oral submissions.

JAGOT J:   Mr Wheelahan, I might be missing something, but all of this is propositions that the primary judge accepted.

MR WHEELAHAN:   Yes.

JAGOT J:   None of this in dispute, as far as I am aware.  The primary judge reached one view, and he accepted all these things, and Full Court majority reached another.  I am just not sure why we are doing this, myself – speaking only for me – I am just not sure why we are not getting to the difference between positions.  I mean, these are all the primary judge’s own findings.

MR WHEELAHAN:   Yes, your Honour, and where this is all going is that we say that both the primary judge and Justice Colvin on the appeal were, with respect, wrong to assume, as we say that they inferentially, if not explicitly, did, that just because PepsiCo and SVC permitted SAPL to use valuable brands, SAPL should have paid them something for that permission.  That is where all of this is going, your Honour.

JAGOT J:   I am ‑ ‑ ‑ 

STEWARD J:   Is that another way of saying that these arm’s length parties have decided that Pepsi will receive its reward from the exploitation of the IP via the promises made, the non‑monetary promises made, by SAPL – but also, in a sense, monetary as well – because SAPL is spending money that Pepsi might otherwise have to spend on building the brand, and so that is the deal that they have struck?

MR WHEELAHAN:   That is the deal that they have struck, and they are both using the IP together.  They are in a joint exercise to build the brand, and on the side, obviously, driving it all, is the purchase of the product itself.  But they are separate things, and one should not assume that just because a permission has been given to the bottler to use the intellectual property so that it can carry out these very important functions that are for the benefit of the PepsiCo Group, that it should be charging the bottler for that use – or permission, we would say – of the intellectual property.

EDELMAN J:   These franchising‑type arrangements, maybe not in precisely these terms, but in general terms, are fairly ubiquitous across all sorts of different types of franchises.  Was there any market evidence as to whether there was a market convention or expectation of payment for intellectual property, in the context of such franchising arrangements?

MR WHEELAHAN:   Your Honour, I do not think it was in contention that the market standard is not to charge a royalty.  Coca‑Cola does not charge a royalty, and there were a number of Coca‑Cola agreements in evidence.  There was also an article called the “Cola Wars” that your Honours might have seen in materials, by a couple of Harvard professors, that describes the market.  I do not think it is in issue that it is standard, this model of selling concentrate and not charging for intellectual property, and then engaging in the same or similar activities, does not include ‑ ‑ ‑

EDELMAN J:   So, at least in terms of the form, the standard is not to have a form of royalty?

MR WHEELAHAN:   Yes, your Honour.

STEWARD J:   Justice Jagot, I think I might have interrupted you – you were going to ask a question, I am sorry.

JAGOT J:   No, I am content, thank you.

BEECH-JONES J:   Mr Wheelehan, you say that the primary judge and Justice Colvin either explicitly or implicitly assumed that SAPL should have – “should” was your word – paid for the use of the brands.  Is that directed to ground 3 or to ground 1?

MR WHEELAHAN:   Your Honour, this arises – it raises its head in a number of places.  So, it is directed to the construction of the EBA itself – the “consideration for” argument – and it also comes up in tax benefit, and also under “purpose”, in the second matter.

BEECH-JONES J:   To the extent that we are talking about ground 1, I actually understood their Honours to say not so much that, but to say:  you cannot separate out the provision of the IP from the purchase – this is a rough summary – from the purchase of the concentrate, and all these other mutual promises are all well and good, but it only serves to demonstrate that there is one integrated, composite deal for which part of the payment moving to PepsiCo is the for the royalty, and it may be that PepsiCo is getting other things, but that does not deny the consideration for – not a question of “should” but, effectively, it is one overall deal.

MR WHEELAHAN:   Your Honour, can I address that ‑ ‑ ‑

BEECH-JONES J:   I know you are going to come to that.

MR WHEELAHAN:   Yes, under the “consideration for” heading, because – just to foreshadow my answer to that – that is an application of the Dick Smith and Lend Lease way of approaching things, and we will try to explain why that is not the correct approach.

GAGELER CJ:   The majority did adopt a Dick Smith, Lend Lease, approach, did it not?  Or do you say it adopted the approach that you contend?

MR WHEELAHAN:   I say they adopted the approach we contend for, because they were able to look at the sales of concentrate for a price as being a transaction in itself.

STEWARD J:   You say they adopted the Davis approach.

MR WHEELAHAN:   Yes, they adopted the Davis approach.

STEWARD J:   They saw what the contract said was the price for the concentrate, and they said that is it.

MR WHEELAHAN:   Yes.  I will come to those cases to develop that further.

STEWARD J:   Davis was $57 – or £57, I cannot remember now.

MR WHEELAHAN:   Yes.  Your Honours, just to round out what I was saying in support of that last submission, the benefit of the bottler’s activities in building volume, market share and generally amplifying the brand ultimately inures to the PepsiCo Group.  If the bottler is replaced – and we will see, soon, that that can happen – PepsiCo retains the benefit of increased brand equity and market share which has accrued over the term.

GLEESON J:   Mr Wheelahan, is the argument that you are putting now recorded in the majority judgment, or are you adding to their findings at 20 and 21?

MR WHEELAHAN:   They are recorded in the majority’s reasons, and I will come to those a little bit later.  I just wanted to explain it broad terms because, as I said, this will arise in a number of different places as I proceed through the day.  I am trying to put this agreement in its broader context, whereas, as I said earlier, the Commissioner’s way of characterising the substance of this scheme is a supply of concentrate, a supply of IP, and a payment, and the payment was paid for concentrate and he says part of it should have been paid for IP.  Now, that is a very myopic way of looking at this arrangement.  There is far more going on under this arrangement.

Could I move to the next section of the outline of oral submissions and deal with royalty withholding tax.  As we have seen, section 128B(2B) requires that the respondents derived income consisting of a royalty paid to them.  Now, as I said, I propose to address payment and income first, effectively together.  I will then address the definition of “royalty”, and specifically what the payments were consideration for.

In terms of payment and income, all three judges of the Full Court concluded that no amounts were paid to the respondents and they did not derive any income.  We see that at paragraphs 45 to 46 of the majority’s reasons and paragraphs 205 to 207 of Justice Colvin’s reasons.  We say the Commissioner has not demonstrated error in those conclusions.

The payments were described by the primary judge – and there is no need to go to it – at paragraph 7(d) to (e), quite, with respect, succinctly and accurately, we would say:

(d)PBS supplied concentrate to SAPL and invoiced SAPL for the concentrate that had been supplied;

(e)SAPL paid PBS for the concentrate in accordance with those invoices.

Now, your Honours, those findings ought to have been enough to dispose of the matter.  Can I take your Honours to one of those invoices, which is in the respondents’ book of further materials, tab 12, page 201.

Your Honours will see this is an invoice issued by PBS, you see that at the top – “PepsiCo Beverage Singapore” – and it is an invoice for three different kits of concentrate.  You can see the page is broadly broken up into a Pepsi Max kit, a 7‑Up kit and a Pepsi‑Cola kit.  The Pepsi‑Cola kit is the original – what they call the “blue can” standard Pepsi.  Your Honours will see there recorded the number of units; so, 416 for the Pepsi Max kit; a unit price, and then an amount price.

But your Honours will also see that that kit price is then broken up into the individual components of the kit, so they each have their own separate prices.  For example, just looking at the traditional Pepsi drink, you can see the Pepsi flavour bears the bulk of the value, and then there is an acidulant with a separate price.  Now, your Honours, on the Commissioner’s case, each of these line items is wrong.  They in fact overstate the price for the particular item identified, in that a part of each of those amounts was in fact for something else that is not recorded on this invoice, being intellectual property rights.

It also means that PBS’s financial accounts were wrong, in that PBS wrongly recorded the whole amount of these payments in accordance with the invoices as being income derived by it on the sale of concentrate.  And it also means that, unbeknownst to PBS, it was, in fact, trading at a loss on its sales of concentrate, having purchased the concentrate from the manufacturer at a price, as we saw, which left it with a very small distribution margin.

What, on the Commissioner’s case, was the nature, in PBS’s hands, of that part of the payment that is alleged to have been paid to PBS pursuant to those invoices – which, despite what they say, was not in fact paid for the supply of concentrate – the Commissioner does not ‑ ‑ ‑

JAGOT J:   Sorry, Mr Wheelahan, I am not sure where this is going either, because the Commissioner’s point is not that it is wrong, it is just that the parties have chosen to put labels on what is being paid for or not, and that these labels are not the whole story.  That is all.  I did not understand any of the Commissioner’s case to be that anything about invoicing was wrong, as you put it.  I am just not sure it is meeting what the Commissioner was actually saying – and the Commissioner may be wrong, for the reasons the Full Court gave, but I am just not following where this bit is going.

MR WHEELAHAN:   Your Honour, the Commissioner contends that a part of the payments that were made for the concentrate should be characterised as in part being a payment for intellectual property because he construes the contract in that way.

STEWARD J:   It is more than that, Mr Wheelahan, the Commissioner’s case was that all of the payments that SAPL made were derived by PepsiCo and SVC – not just the royalty, but the whole lot.

MR WHEELAHAN:   That is right, your Honour, and even if that ‑ ‑ ‑ 

STEWARD J:   And he needed to make that submission to get the income derived point home.

MR WHEELAHAN:   Yes, your Honour, and even if that were the case, and PBS is issuing invoices for amounts that are actually payable to PepsiCo, these are still inaccurate.  But we say that the fact that they have been issued by a separate entity is not something that needs to be ignored; this is a real company carrying on a real business of purchasing and selling concentrate, and these are the prices for which it is selling the concentrate.

They are juridical facts, so you cannot characterise your way out of those juridical facts, and what the Commissioner has not answered is what is the character of these payments in the hands of PBS, where he eschews any argument that PBS was selling the concentrate as agent for PepsiCo and he eschews any argument that the amounts were received by PBS on trust for PepsiCo.

BEECH-JONES J:   You pleaded, as I recall it, that the payments were made under the EBAs.

MR WHEELAHAN:   Pursuant to the terms of the EBAs. 

BEECH-JONES J:   Yes, under – were they paid under the EBAs?

MR WHEELAHAN:   Yes, your Honour, we do not resile from our pleading that the payments were made pursuant to the terms of the EBAs, because the ‑ ‑ ‑ 

GAGELER CJ:   Can I be a little bit more specific?

MR WHEELAHAN:   Yes, your Honour.

GAGELER CJ:   Is it the fact that the prices we see in the invoice are prices that were determined in accordance with clause 4 of the EBA?

MR WHEELAHAN:   We understand that to be the case.

GAGELER CJ:   Yes.  And then, the obligation to pay the invoice is an obligation that arises under clause 4 of the EBA, is it?

MR WHEELAHAN:   The obligation is to pay PBS for the purchase of the concentrate, yes.

GAGELER CJ:   By virtue of the contractual obligation that arises under clause 4 of the EBA?

MR WHEELAHAN:   Yes, and clause 4 contemplates – so, the EBA, as the majority said, is not itself a contract pursuant to which goods are sold.  It is not a sale of goods contract; it is a contract that contemplates the entry into further transactions.  What the EBAs provide for is that when the bottler enters into those further transactions with, here, the nominated seller, and buys concentrate from the nominated seller, then it must pay the nominated seller.  That is what we say that clause 4 does, and I will come back to that.

EDELMAN J:   That is the case that the Commissioner says was not run below.  So, the Commissioner says that the case you were running below is that clause 4 was the sale, that clause 4 was not a promise to enter into a sale.

MR WHEELAHAN:   Yes, your Honour, can I address the pleading point?

BEECH-JONES J:   While you are doing that, can you tell me what you say is the source of the obligation to pay the money in this invoice – what is the legal source of it?

MR WHEELAHAN:   The immediate source is the invoice.

BEECH‑JONES J:   Is that because the invoice records a contract?

MR WHEELAHAN:   Yes, the invoice does record a contract, together with the purchase orders.

BEECH‑JONES J:   Between PBS and SAPL?

MR WHEELAHAN:   Yes, your Honour.

BEECH‑JONES J:   And that was run below?

MR WHEELAHAN:   Yes, your Honour.

BEECH‑JONES J:   All right.  I am sorry, I distracted you from Justice Edelman’s question and answer.

MR WHEELAHAN:   Well, it folds neatly into that.  So, we pleaded that the payments were made pursuant to the terms of the EBAs and we do not resile from that, that is an accurate statement.  The sales by PBS to SAPL were contemplated by the EBAs and were done in performance of it.  There was an obligation ‑ ‑ ‑ 

EDELMAN J:   In performance of it in the sense that, you say, there was an entry into a contract as required by clause 4.

MR WHEELAHAN:   Precisely.  It uses the word “buy” – purchase – the entity is referred to as the “seller”, it contemplates the entry into further transactions which are themselves sales and, therefore, a contract.  We have referred in our submissions to the cases – or a number of cases – which stand for the proposition that sale means consensual contract, which imports an agreement to transfer property for valuable consideration.

GORDON J:   Mr Wheelahan, where we you reading from there, where you were identifying the way in which the case was put?  Is there somewhere where that is articulated clearly?

MR WHEELAHAN:   Yes, your Honour, I will ‑ ‑ ‑ 

GORDON J:   Because I am reading page 126 of the applicant’s book of further materials, which is paragraph 10, which we were taken to yesterday, I think.

MR WHEELAHAN:   Yes, your Honour, and in ‑ ‑ ‑ 

GORDON J:   If you could just identify the place where we can find the way the case was put by you.

MR WHEELAHAN:   It is at paragraph 10a, pleads a sale by PBS to SAPL.  We, in our opening written submissions at trial, submitted that the sales:

took place within a commercial framework –

of the EBAs.  That was at paragraph 2 and it is behind – it is at page 283 of the book.

GORDON J:   Which book is that?

MR WHEELAHAN:   The respondents’ book of further materials.

GORDON J:   Sorry, what page is that, again?

MR WHEELAHAN:   Page 283.

GORDON J:   Thank you.

MR WHEELAHAN:   In responding to the Commissioner’s payment a direction case – and I should add, I will not go to the detail of it now, your Honours, but in footnote 22 of our submissions we have recorded some of the history of the Commissioner’s payment by direction case – the Commissioner did not plead this payment ‑ ‑ ‑ 

GLEESON J:   Mr Wheelahan, would you mind just going a little more slowly.

MR WHEELAHAN:   Certainly, your Honour.

GORDON J:   Can I just walk through that?  So, we have the 10 – at page 126 of the applicant’s book of further materials, we have your pleading.

MR WHEELAHAN:   Yes, your Honour.

BEECH‑JONES J:   And the paragraph, sorry, of the submissions?

MR WHEELAHAN:   Sorry, your Honour?

GORDON J:   That is all right.  In the applicant’s book of further materials, at page 126, paragraph 10, we were taken to yesterday, which is your pleading that during the relevant period:

In performance of the EBA:

a.the Applicant caused PBS to sell Units to SAPL and SAPL purchased the Units from PBS at the prices specified in the EBA –

MR WHEELAHAN:   Yes, your Honour, and that is the pleading of a contract of a sale by PBS to SAPL.

STEWARD J:   So, there is a series of multiple contracts, presumably oral, or partly oral, partly in writing, with the invoices and purchase orders.

MR WHEELAHAN:   And, necessarily, contracts are sales of ‑ ‑ ‑ 

STEWARD J:   And that is consistent with that agreement between Singapore and PBS, where PBS is given the contractual distribution rights for Australia, Philippines, Korea and Thailand.

MR WHEELAHAN:   Yes, your Honour.

STEWARD J:   That is its business.

MR WHEELAHAN:   So, the Commissioner, in his defence, admitted there was a purchase by SAPL, of the concentrate from PBS ‑ ‑ ‑

GLEESON J:   Where is that?

MR WHEELAHAN:   Page 132 of the same book.

STEWARD J:   Of the respondents’ book or the appellant’s book?

MR WHEELAHAN:   The same book, the respondents’ book of further material.  The same book we are in.

STEWARD J:   Thank you.  Page 132, which paragraph?

MR WHEELAHAN:   Paragraph 10(b)(i).

STEWARD J:   Thank you.

EDELMAN J:   That comes down, again, to what you mean by “under the EBA”.

MR WHEELAHAN:   It does, your Honour, and they are just words.  There is nothing in the way that we pleaded this case that suggests, and nor did we run our case on the basis that there were no separate sale contract between PBS and SAPL.  Can I take your Honours to where our submissions are recorded in the reasons of the trial judge ‑ ‑ ‑

BEECH-JONES J:   Just while we are there, are the pleadings materially the same for the Gatorade Case?

MR WHEELAHAN:   Yes, they are, your Honour, effectively.

BEECH-JONES J:   Can you just tell me what pages they are, again?  Are they in the materials?

MR WHEELAHAN:   I think they are in different places.  There might be – some of them are in the respondents’ ‑ ‑ ‑

GAGELER CJ:   Mr Wheelahan, I am sorry, when you finish that question, I have a question that I want to go back to, referring to paragraph 10.

MR WHEELAHAN:   Yes.  Perhaps if we could come back to Justice Beech-Jones, with the references.

BEECH‑JONES J:   Yes, that is fine.

STEWARD J:   You were going to give us the finding?

MR WHEELAHAN:   Yes, I was going to turn to the findings.  Would your Honour like me to do that first?

GAGELER CJ:   Yes, do that first.

MR WHEELAHAN:   Firstly, if I could take your Honours to paragraph 7, which I mentioned earlier ‑ ‑ ‑

JAGOT J:   Sorry, are we in the primary judge’s judgment?

MR WHEELAHAN:   Yes, your Honour, the trial judge’s reasons.

JAGOT J:   Yes.

MR WHEELAHAN:   Paragraph 7, in (d), records the findings that:

(d)PBS supplied concentrate to SAPL and invoiced SAPL –

And that:

(e)SAPL paid PBS for the concentrate in accordance with those invoices.

At paragraph 238, where his Honour sets out PepsiCo party’s submissions, in subparagraph (d) his Honour records the submission, in the second sentence, that:

The payments SAPL made to PBS pursuant to the purchase orders and invoices moved the transfer of title in the concentrate –

And then, the final sentence:

The payments were not, themselves, consideration passing from SAPL to PepsiCo/SVC; the payments are distinct from the promise to purchase the concentrate at the specified prices.

Then, in paragraph 239(b):

The legal terms and commercial aspects of the implementation of the transactions between the PepsiCo, SAPL and PBS described in the reply submissions are those that must be the subject of characterisation –

and (c):

It is these same legal and commercial aspects of the transactions in question that the Commissioner impermissibly seeks to recast by overlooking the source of the obligation to pay the amounts (purchase orders and invoices); and by overlooking or denying the fundamental nature of the transactions as sales of goods.

Chief Justice Dixon rejected that argument and he held that the consideration was limited to the purchase price for the shares as expressed in the contract.  That was not because the price in the contract is always determinative of the question, and his Honour expressly says that in the middle of page 408, in the paragraph beginning:

No doubt, when a transfer or other assurance of property is expressed to be made for a nominal consideration, for many purposes it is open to prove further consideration not being inconsistent with the nominal consideration expressed therein.  And this may be so although there is no mention of the real consideration.

So, there is a characterisation process that needs to take place.  In any event, it was not needed in this particular case, because it was a case where the parties had given the transaction the form of a sale for a price, and there was nothing else going on.  There was no other dimension.  It was, admittedly, a sale at an undervalue, but it was an intentional sale at an undervalue, not a sale where value was being provided by reference to something occurring outside of the contract or in some other dimension.  And the sale, of course, commercially, at an undervalue, was explicable because it was within a wholly‑owned group.

So, if there is a difference between Davis and Dick Smith and Lend Lease, it is explained by what Justice Colvin said in paragraph 186 of his judgment in the Full Court below.  His Honour said that Davis was decided in the way that it was because of the “nature of the agreement”:  it was a sale agreement where nothing else was being given up.  There was no other dimension, to use the expression that his Honour uses.

In Dick Smith and Lend Lease, the agreement had – again, to use Justice Colvin’s expression – “other dimensions”.  That is, the financing of the dividend amount and the development contributions.  I would also note that in Dick Smith and Lend Lease, the Court proceeded on the basis of the articulation in Archibald Howie of what “consideration for” means, and no suggestion was made that the different form of the stamp duty provisions required otherwise.

Your Honours, with respect to “substance” in the context of tax benefit, and section 177CB(4), a contractual allocation of a payment will only be part of the substance of an arrangement when there is a compelling commercial reason for having allocated the payment in the relevant way.  And in this case, your Honours, the taxpayers have advanced no reason other than history why the SAPL payment was allocated solely to concentrate.

It is an argument that it has always been done this way and everybody else in the industry does it.  There is no evidence here, either, that there is only one way in which the PepsiCo Group could have sold its soft drinks in Australia, which would be necessary in order to come to a conclusion that there is no reasonable alternative to the scheme.

So, there is a real difficulty, in my submission, in the proposition that the allocation of the EBA payments solely to concentrate is an aspect of the substance of the arrangements.  The allocation of the monetary consideration under the EBAs is something that can be changed without affecting the key features of the franchising bottling agreement, and all of the judges below accepted that the same results and consequences emanate from the scheme and the alternative postulates.

Previously, my friend relied on evidence of Mr Williams in relation to the unreasonableness of the postulates that I put forward, but as I understand it now, that argument is no longer relied on.  The respondents would have this Court apply a very narrow approach to assessing whether a postulate is a reasonable alternative to a scheme.  On their approach, the particular drafting of the bottling agreement needs to remain essentially identical, in the counterfactual, for the postulate to be reasonable.

That construction, in my submission, finds no support in 177CB(4).  It talks about a “reasonable alternative”, not a replication of the actual scheme.  Like the errors we have pointed to in the majority’s analysis of tax benefit, the respondents misconstrue “the substance” in subsection 177CB(4)(a)(i), and then gives the misconstrued notion of “substance” determinative weight in terms of the application, then, of 177CB(4) as a whole.

But, more importantly, such a construction as is urged by the respondents would strip the DPT provisions and Part IVA more generally of real operation.  The anti-avoidance rules depend on identifying a tax benefit by pointing to a tax difference between how affairs are actually organised and how they might otherwise reasonably be expected to have been organised.  If the standard of “a reasonable alternative” is fixed too stringently, then that comparison simply becomes unworkable, and the whole purpose of introducing 177CB was to remove barriers that had been identified in previous cases to establishing a reasonable postulate in absence of the scheme.

The respondent relies on Minerva and Hart, as your Honours have just heard, and the proposition that emerges from both of those cases – and others, of course – that the mere fact that a taxpayer has obtained a tax benefit does not support a positive conclusion as to purpose.  Of course, that is right, but it does not follow from this that the requisite tax purpose could only exist where a taxpayer adheres to a scheme in the face of a postulate which has something additional, apart from tax, to commend it.  That was the language that my friend used.

Now, a comparison here between Minerva and Hart is instructive, in my submission.  In Minerva, the criticism that the Commissioner’s case faced was that the counterfactual did not achieve the same commercial non‑tax outcomes as the scheme. And one sees that in the concluding analysis in the case at paragraph 121 of the judgment, which I will not take your Honours to, but it is in the joint bundle of authorities at pages 471 to 472. This, in the Minerva Case, informed why the Court was not prepared to accept that the dominant purpose of the scheme was to reduce tax.

In Hart, unlike in Minerva, the commercial objectives of the scheme were met by the counterfactual, so that the Harts were still able to finance their home and their investment property – or would have been able to do those things – under a borrowing where the interest payments were spread rateably over the private and investment loan amounts.  The alternative postulate in Hart was a less‑contrived way of achieving precisely the same non‑tax commercial results, so there was nothing to commend the alternative postulate in Hart over the scheme.

Nevertheless, it was found that Part IVA was applicable, and there was found to be a contrivance in the same way that the trial judge, in the passage in which I took your Honours to this morning, came to the conclusion that the form and substance and the difference between them in this case led to the conclusion that there was a contrivance in relation to the scheme.

In relation to the memorandum that my friend took your Honours to this afternoon in aid of his submissions on whether the parties were dealing at arm’s length, and the point that I had put earlier about Collis, there is nothing in that memorandum that reflects on any negotiation about allocation of monetary consideration between the total amounts paid by the bottler between different items.  So, the allocation was not a matter that was the subject of any arm’s length negotiations, and that is not reflected in that memorandum.

STEWARD J:   But did you get any findings of fact on that?

MS DEARDS:   No, your Honour.

STEWARD J:   I am not sure we can do much about that.

MS DEARDS:   I am not urging a finding of fact in relation to an arm’s length dealing.  I do not need that for my case.

STEWARD J:   All right.

MS DEARDS:   It is responsive to points that have been put against me, your Honour.

STEWARD J:   Sure.

MS DEARDS:   In relation to the onus point, my friend mentioned two cases where he says that the Commissioner – or the taxpayer was able to succeed without being able to show a positive counterfactual.  I will be very brief in relation to this.  We have addressed what the respondent says about that in relation to Peabody at paragraph 25 of our written reply, and I rely on those submissions.

My friend also mentioned the case of Mochkin, which is not in the bundle of authorities, but it was a case where, at first instance Justice Ryan dealt with the application of Part IVA simply on the basis of purpose.  On appeal, tax benefit was also the subject of submissions, but the way that the Full Court dealt with the purpose and the tax benefit issues was to decide purpose first.  Tax benefit was the subject of some obiter that emanated after the conclusion on purpose had already been reached that the relevant purpose was absent, and it is not clear at all from the reasons in obiter on tax benefit as to whether or not any argument on onus had been put.

Your Honours, one final – more of a housekeeping matter than anything else.  As his primary position, as your Honours know, the Commissioner seeks the reinstatement of the orders of the primary judge in relation to withholding tax, and, as his alternative position, the Commissioner seeks the reinstatement of the DPT assessments – that is how the mechanics work – that the primary judge set aside, having found in the Commissioner’s favour on his primary case.

Now, because we have separate proceedings – because, again, that is how the mechanics work – for royalty withholding tax and diverted profits tax, there might be some uncertainty as to what orders should be made in each of the respective proceedings, if we were to succeed in either of the two cases.  Of course, our notices of appeal set out the orders that we seek if we are successful in each of our respective cases, but the interaction between them creates some uncertainty.

To address that uncertainty, we have prepared some bundles of orders that address the different permutations and combinations, and we have provided those to the respondents.  It may be appropriate for the Court to direct that the parties seek to agree those orders and to provide any agreed orders to the Court within a short period, failing which the parties might provide a brief note outlining their respective positions on final relief.

GAGELER CJ:   How long do you want?

MS DEARDS:   If we could have a week, we would be grateful, your Honour.

GAGELER CJ:   Certainly.

MS DEARDS:   May it please the Court.

GAGELER CJ:   Thank you, Ms Deards.  The Court will consider its decision in these matters and will adjourn until 10.00 am next Tuesday.

AT 3.49 PM THE MATTERS WERE ADJOURNED