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

[2025] HCATrans 23

[2025] HCATrans 023

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 WEDNESDAY, 2 APRIL 2025, AT 10.05 AM

Copyright in the High Court of Australia

____________________

MS K.J. DEARDS, SC:   May it please the Court, I appear with MS T.L. PHILLIPS and MR R.J. MAY for the appellant.  (instructed by MinterEllison)

MR E.F. WHEELAHAN, KC:   If the Court pleases, I appear with MS C.M. PIERCE, SC and MR A.M. HASKETT for the respondents.  (instructed by PricewaterhouseCoopers)

GAGELER CJ:   Thank you, Mr Wheelahan.  The transcript will record that Justice Jagot is participating in the hearing remotely from Sydney.  Yes, Ms Deards.

MS DEARDS:   These appeals concern arrangements entered into in 2009 whereby two American Pepsi Group companies contracted to provide concentrate and to license Pepsi intellectual property to an Australian bottler.  At the time, the bottler was part of the Schweppes group, and it is referred to in the evidence and the decisions below as SAPL.  From 2016, SAPL made payments into the bank account of another Pepsi subsidiary, PBS, which was incorporated in Australia.  The nature and the use of that intellectual property was extensive.

This is a case where the Australian bottler manufactured the drinks in Australia using detailed, proprietary information in the form of manufacturing manuals.  The bottler applied Pepsi Group trademarks to the finished beverages.  It used designs in the form of bottle and can shapes.  It received ancillary assistance, furnished by the PepsiCo Group, as a means of enabling the enjoyment of that intellectual property.  The Court will see that the licence of this IP is a very significant feature of the exclusive bottling arrangements, or EBAs.

This is not a case where an Australian distributor simply imported and onsold branded products and needed a licence to cover incidental use of trademarks.  The EBAs provided for the bottler to make payments with prices expressed by reference to units of concentrate.  Neither of the EBAs include an explicit royalty.  The SVC EBA goes so far as to say that the licence of the IP is royalty free.  The Commissioner’s case is that the Income Tax Assessment Acts respond to an arrangement like this in one of two ways.

Its primary case is that the payments made under the EBAs were, in part, section 128B royalties that were income derived by PepsiCo and SVC.  That covers appeal grounds 1 and 2.  Your Honours will have noticed the background of the double tax agreement between the United States and Australia which imposes a five per cent limit on the withholding tax rates that Australia can charge on royalties that are paid to qualifying United States residents.  There is no dispute that if section 128B is satisfied, then the treaty requirements are also met, and the five per cent cap applies.

The Commissioner’s alternative case is that if there was no royalty susceptible to the royalty withholding tax provisions, the diverted profits tax applies to impose a 40 per cent tax impost on what the Commissioner says might reasonably be expected to have been a royalty payment if the scheme had not been entered into or carried out.  The DPT has its own charging provisions, but its assessment mechanics are part of Part IVA of the Income Tax Assessment Act 1936.  Ground 3 of the appeal arises from the way in which the majority below dealt with the DPT.

Your Honours, I will deal with each of the propositions in my oral outline in turn, beginning with proposition number 1.  The first issue is the correct approach in determining whether a payment included in an amount was consideration for the use of intellectual property within the definition of “royalty” in section 6(1) of the 1936 Act.  This issue arises because subsection 128B(5A), which is the royalty withholding tax charging provision, requires the payment to consist of a royalty.

Can I start by taking your Honours to the 1936 Act, which is in the joint book of authorities, volume 1, at page 29.  Your Honours will see there, at about point 2 of the page, subsection (5A):

A person who derives income to which this section applies that consists of a royalty is liable to pay income tax upon that income at the rate declared by the Parliament in respect of income to which this subsection applies.

Normally, that rate is 30 per cent, but as I indicated before, the treaty reduces it down to 5 per cent.  If your Honours turn back a few pages to pages 21 and 22, your Honours will see section 128B(2B) at the bottom of page 21, which provides the subject ‑ ‑ ‑

GAGELER CJ:   You might just have to take us a little slower, I think, as you take us to these provisions.

MS DEARDS:   Apologies, your Honour.

GORDON J:   We have a printed copy.  If you could just tell us what the sections are you are taking us to, rather than the page, I think we will follow it better.

MS DEARDS:   Thank you.  Your Honours, I am at 128B(2B).

GAGELER CJ:   The provision you took us to before, can you remind us of that again as well, please?

MS DEARDS:   Okay, your Honour.  The provision I took your Honours to before is 128B(5A).  I took your Honours to that provision first because it is the charging provision.  And now feeding back to (2B), it provides ‑ ‑ ‑

GAGELER CJ:   I am not sure our page numbers match up to your page numbers, but it does not matter.

MS DEARDS:   Apologies, your Honour.  I will just give you the legislative references and we will get there.

GAGELER CJ:   Thank you.

MS DEARDS:   It provides:

Subject to subsection (3) –

which are some exclusions that are presently irrelevant:

this section also applies to income that:

(a)is derived by a non‑resident:

. . .

(ii)during a later year of income of the non‑resident –

that is just skipping down to (ii), and, more importantly: 

(b)consists of a royalty that: 

(i)is paid to the non‑resident by a person to whom this section applies and is not an ongoing wholly incurred by that person in carrying on business in a foreign country at or through a permanent establishment of that person in that country –

The permanent establishment issue is not relevant; the relevant part of this is that it must consist of a royalty, it must be paid to the non‑resident – and in the beginning of Part II, it must be income, which we will come to.

STEWARD J:   Can I ask you a question, Ms Deards.  Do you accept that parties acting at arm’s length can enter into an arrangement in which intellectual property rights are provided but the bargain is that they are provided for free?

MS DEARDS:   Yes, I do not doubt that they would be acting at arm’s length in relation to the whole arrangement, your Honour.  But if the question was, were they acting at arm’s length in relation to the licence of the intellectual property, then my answer to that would probably be different.

STEWARD J:   But, here, there is no suggestion that Schweppes and Pepsi were not acting at arm’s length in relation to the negotiation of the EBAs.

MS DEARDS:   No, that is correct, your Honour.

STEWARD J:   So, if somebody said, I will sell you some concentrate and I will throw in a set of steak knives, you are not suggesting that in every case the consideration payable would have to be allocated as between steak knives and concentrate.

MS DEARDS:   Certainly not, your Honour, because in that example the steak knives would be largely irrelevant to the production of the finished beverages.  My case is that the intellectual property here was a critical part of the transaction.  I will take your Honours through the terms of the EBAs that demonstrate that.

STEWARD J:   Just so I am clear, your case, therefore, must be that the actual bargain as documented in the EBAs, included an agreement to make a payment in part – part of that concentrate payment, if I can call it that – you do not call it that, but just for the sake of the argument, that there was, actually, an agreement to pay a royalty for the intellectual property.  That is what the parties agreed.

MS DEARDS:   Yes.  What the parties agreed was to make a payment, and that payment was consideration for both the concentrate, which the bottler needed in order to make the beverages, and in order to secure the intellectual property.

STEWARD J:   We will know that by reason of construction of the agreement?

MS DEARDS:   Yes, your Honour.

STEWARD J:   I see.  Thank you.

MS DEARDS:   Yes.  Which is part of the general process of characterisation that I say needs to be undertaken in order to determine what was consideration for ‑ ‑ ‑ 

STEWARD J:   So, there is no freestanding capacity of the Commissioner to reallocate the consideration – we take the agreement as we find it?

MS DEARDS:   Absolutely, your Honour.

STEWARD J:   Thank you.

EDELMAN J:   There is no payment for any of the intellectual property rights in any of the cooperative marketing or advertising agreements?

MS DEARDS:   No, that is correct, your Honour, and, in fact, there was an issue in the evidence below where one of the witnesses indicated that one of the reasons why the Commissioner’s counterfactuals would be unreasonable was because there was a perception – this was the evidence of Mr Williams – that the bottler was already making a payment for the use of intellectual property pursuant to the Co‑op A&M Agreement.

When Mr Williams was taken to that agreement, there was a provision in that agreement that applied to the relevant years that required the bottler to acknowledge that they were not making a payment for the use of the brands.  Mr Williams had never seen that provision before, he was not familiar with it, and the primary judge made a finding that there would not have been a perception that the bottler thought that they would be making a double payment if they were asked to pay a royalty, an explicit royalty, under the EBA arrangement.

GORDON J:   You will have to come back to those agreements at some point, I assume – will you, as part of the constructional analysis of the construction of the contracts?

MS DEARDS:   Yes, your Honour, I was planning to take your Honours through the EBAs in some detail when I get to proposition 4.

GORDON J:   Thank you.

MS DEARDS:   You will see that I have listed a number of the clauses there, but also in relation to proposition 6, where I need to deal with income being derived – because there is a different set of provisions that I rely on for that.

GLEESON J:   Ms Deards, are you still at section 128B(2B)(b)?

MS DEARDS:   Yes, your Honour, I had not moved on from that.

GLEESON J:   Before you do I have a question.

MS DEARDS:   Thank you.

GLEESON J:   Finish what you have to say.

MS DEARDS:   Your Honour, now would probably be a convenient time.

GLEESON J:   In (b):

consists of a royalty that:

(i)is paid to the non-resident by a person to whom this section applies –

On your case, the non-residents are the respondents?

MS DEARDS:   Yes, your Honour.

GLEESON J:   And the payment by a person to whom this section applies, what is that payment?

MS DEARDS:   That is the payment that Justice Steward characterised as the concentrate payment, which I do not ‑ ‑ ‑

STEWARD J:   Let us not use that label, to be fair.

MS DEARDS:   Yes, it is the payment that is made pursuant to the EBA.

GLEESON J:   Concentrate payment, but it:

is paid to the non-resident by a person to whom this section applies –

Who is the person to whom this section applies?

MS DEARDS:   SAPL, the Australian bottler, your Honour.  So, they would be the person who would then be obliged under other provisions of the Act to withhold the royalty withholding tax.

GLEESON J:   Thank you.

MS DEARDS:   Can I take your Honours now to the definition of “royalty”, which is in section 6(1) of the 1936 Act.

GAGELER CJ:   We are there, thank you.

MS DEARDS:   There:

royalty or royalties –

is defined to include:

any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as the case may be, as consideration for –

and then there is a series of items listed in the subparagraphs that I will not read out.  Some of them are in the nature of intellectual property and some of them are not, but as a general proposition, that is their overall character.  What I emphasise in relation to this definition is that it uses the words “to the extent to which”, which confirms that an amount can be paid partly as consideration for the use of intellectual property and partly for something else.  They are words of apportionment.

The second point that I emphasise is that the definition says that a royalty includes an amount “however described or computed”, so, accordingly, how the parties label or calculate the payment is not determinative.  Your Honours, the expression ‑ ‑ ‑

GORDON J:   Is that any more than just to say that the label is not determinative?

MS DEARDS:   I beg your pardon, your Honour?

GORDON J:   Is that any more than to say that the label is not determinative?

MS DEARDS:   Yes.

GAGELER CJ:   I think you have also said the method of calculation is not determinative as well.

MS DEARDS:   That is correct.  The expression “as consideration for” has been considered by this Court on a number of occasions in the context of other taxing provisions.  Can I ask your Honours to Archibald Howie v Commissioner of Stamp Duties. 

GORDON J:   Sorry, just before we leave, I have one question about royalty.  Which bit of – I assume that it is (a) that you rely upon?  You cannot rely upon all of those subparagraphs.  Are we actually looking at the amount that is paid or credited that, you say, gives rise to the royalty being picked up – that is, the definition?

MS DEARDS:   Yes, your Honour.  The way it was dealt with below was that the parties agreed that there were a list of what were called “Relevant Items”, which are listed in paragraph 333 of the primary judge’s reasons, that all fell somewhere within one of these definitions.  But, principally, your Honour, it would be subsection (a), as your Honour has indicated.  But there might be other items that fall within (d):

the supply of any assistance that is ancillary –

because there were items, including manuals, information and assistance that was provided by the PepsiCo Group pursuant to the EBA to assist the bottler to produce the beverages correctly.

Can I ask your Honours to turn to Archibald Howie v Commissioner of Stamp Duties (1948) 77 CLR 143. Your Honours, in this case, the company resolved, pursuant to a capital reduction, to distribute to shareholders in specie shares in other companies at the value in the company’s books.

The Court held that the consideration for the conveyance was the diminution in value in the shareholders’ rights to make claims on the assets of the company, which was equivalent to the market value of the shares that were distributed in specie and not their book value.  If I can ask your Honours to turn to page 152, using the CLR references, the first full paragraph on that page says that:

In the context I think that 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.  The difference is perhaps not very material because the consideration must be in money or money’s worth.  But in the law of simple contracts it is involved with offer and acceptance:  indeed properly understood it is perhaps merely a consequence or aspect of offer and acceptance.  Under s. 66 the consideration is rather the money or value passing which moves the conveyance or transfer.

That is the famous passage that has been picked up in a number of other subsequent cases to which I will take the Court.  What follows, on the balance of page 152 and 153, is an explanation of the effect of a capital reduction on the value of each share as a proportion of the share capital of the company.

Justice Dixon explains that the capital reduction is an “effectuation” of the rights that the shareholder gets under the articles of association when he or she acquires the share.  The contribution that the shareholder makes on acquisition of the share measures his or her right to any later return of capital.  So, the consideration for – to return to the statutory phrase – the return of capital was, therefore, the reduction in the value of the shareholders’ claim upon the assets of the company.

STEWARD J:   Ms Deards, are these stamp duty cases really relevant, in any way, to this case?  I mean, your case must turn on the correct construction of the EBA – the two of them – and you will either demonstrate that the deal that was struck between Schweppes and Pepsi is that there was going to be part of the payment – I will call it the SAPL payment, rather than concentrate payment – part of that payment was for the right to use Pepsi’s intellectual property, or not.

MS DEARDS:   Yes, your Honour.

STEWARD J:   The irony of the stamp duty cases is that it was the taxpayer who wanted to do what you wanted to here – that is, bifurcate the payment – and the conclusion reached in Lend Lease and Dick Smith was you could not do that.

MS DEARDS:   Yes, your Honour, but just because the result differs in terms of bifurcation or bringing things together, I think the general principle that I am trying to draw from these authorities is that the ‑ ‑ ‑

STEWARD J:   The consideration is what moves the transfer of the property.  I do not think Mr Wheelahan disputes that here, as a matter of law, he disputes the way you read the agreements.

MS DEARDS:   I think what divides us, your Honour, is that Mr Wheelahan’s focus is on one or two clauses in the agreement, whereas I say that one needs to read all of the provisions in the agreement to take a wider approach, and that is really more consistent with the type of approach that was taken in Dick Smith and Lend Lease – which I am planning to go to.

STEWARD J:   Okay.

GORDON J:   Could you just tell me what you think the general proposition is?  You were just about to say what the general proposition is that you seek to draw from these cases.

MS DEARDS:   The general proposition I seek to draw is that it is necessary to look at the whole of the agreement, the whole of the arrangement between the parties, in order to characterise the consideration.

EDELMAN J:   And the consideration in the sense Justice Dixon uses it is in its perhaps original, historic sense of the basis for the transaction, rather than the quid pro quo.

MS DEARDS:   Yes, that is correct, your Honour.  I think it is particularly ‑ ‑ ‑

BEECH-JONES J:   There are two different concepts that seem to be floating around – at times, and in the courts below, we use the phrase “construction”.

MS DEARDS:   Yes.

BEECH‑JONES J:   I actually do not understand – I will be corrected – that there is any dispute about the construction of the EBAs.  Then you use the phrase here, I think, “characterisation”, which says we do not dispute the construction of the agreement, but then we step back and say:  what is the payment for?  Is that where we get to?

MS DEARDS:   Your Honour, I think there probably has been some confusion below in relation to that, and I think there are some references in the Full Court’s judgment to the difference between the construction argument and the characterisation argument.  From my perspective, the construction of the agreement is the first step, one needs to undertake that and to look at all of the provisions of the agreement to come to the proper construction of the obligations under the agreement – the rights and obligations under the agreement.  But one also needs to consider that in a broader sense in order to come to a proper characterisation for the purposes of ‑ ‑ ‑ 

EDELMAN J:   That is because one is not looking for an express or an implied term of the agreement.  It might be an express or implied term, but it does not have to be.

MS DEARDS:   Yes, I am not saying that it rises to an implied term, your Honour, so I am not going that far.

EDELMAN J:   But that is what is separates “construction” from “characterisation”.  Characterisation depends upon construction but it does not require you to identify a term of the agreement.

MS DEARDS:   Yes, yes.  We would agree with that, your Honour.

STEWARD J:   But just so we are clear, we are not talking about some freestanding characterisation 10 years later on by a third party, but what the parties agreed.  So, you accept that they could have agreed – you do not say this is what they agreed, but they could have agreed – to provide the IP for free, and that would be respected.

MS DEARDS:   Yes.  They could have agreed to provide it for free, and if the circumstances and the proper characterisation of the deal that was struck between them was that it was being provided for free, and one would genuinely come to the conclusion that no part of the monetary consideration was being provided as consideration for the use of the intellectual property, then, yes, your Honour, but I think it begs the question, in a sense.

STEWARD J:   Yes, I understand.

GAGELER CJ:   So, it is consideration in the total failure of consideration sense, like Roxborough v Rothmans?

MS DEARDS:   Yes, your Honour, and this is why I think the approach in Dick Smith and Lend Lease, which it seems your Honours are familiar with, is particularly apt in these circumstances.  We have a statutory instruction in section 6(1), in the definition of royalty, to identify a royalty however it is described.  It is an invitation, as we have indicated before, to look beyond a label, and it is consistent with the approach taken by Justice Colvin and Justice Moshinsky below.  It is also an approach that has been picked up in other areas of the Income Tax Assessment Acts, like in the context of transfer pricing.

STEWARD J:   But in transfer pricing, you do substitute the consideration.  It is a different deal.  We are not in that world yet; we are in the world of the actual deal.

MS DEARDS:   Yes, that is true.  The statutory phrase, as your Honour will recall, in section 136AD(3) and (4) is “consideration for”.  And yes, your Honour, it is on a statutory hypothesis, so, one hypothesises an arm’s length dealing for the purposes of transfer pricing, but having established that hypothesis, one needs to determine what would be paid as consideration for the transfer of whatever it is that is the subject of that particular arrangement, for the purposes of Division 13.

GORDON J:   One of the reasons why there may be this debate is because the royalty argument is very much, as I understand your case, dependent upon the proper construction of the contracts, absent anything else.

MS DEARDS:   Yes, your Honour.

GORDON J:   The diverted profits tax, of course, is looking at, in effect, a scheme and looking at alternatives, and so, one therefore has some form of characterisation undertaken.

MS DEARDS:   Yes.

GORDON J:   But in relation to this point, which we are dealing with now, with no characterisation question, as I understand your argument.  It is purely a construction question.

MS DEARDS:   Yes.  It is a construction question, but it requires, as the courts have said, in my submission, in cases like IBM – which my friend relies on for the purposes of the royalty withholding tax provisions – and Dick Smith and Lend Lease, they do characterise it or they do describe it as a process of characterisation and not just as a construction.  So, it is a matter of construction of the provisions, but in the context of identifying what the commercial dealing is so that one can come to a correct characterisation of the consideration under the arrangement.

STEWARD J:   But part of that was because of the definition of dutiable value, which forced you into a more objective characterisation type of analysis – what was the dutiable value of the land in Lend Lease and so on.  We do not have that, really, so much here.  Our question is simply whether, in these agreements, it can be said that Schweppes agreed to pay a royalty for the right to use the intellectual property that it in fact received – or the licence to use, sorry.

MS DEARDS:   Your Honour, in my submission, the phrase “as consideration for” is the same both in 128B but also in the stamp duty provisions.  The inclusion of the phrase “however described” in the section 6(1) “royalty”, I think, requires the same kind of objective approach that your Honour has just identified to be taken to the present circumstances.  Your Honours, I think I have probably dealt now with my proposition 2, the role of construction.

I will move now to proposition 3 in my oral outline, which is the central transaction test.  This point addresses the approach taken by the majority below, which is what we have described as a central transaction test, and as we have noted in our reply submissions, the respondents do not seek to defend that central transaction approach.  Your Honours will see at paragraph 29 of the Full Court’s judgment below that the majority perceived there to be a tension or conflict between Dick Smith and Lend Lease on the one hand and the approach in Davis on the other.

The respondents say in their written submissions that there is no tension or conflict between those decisions.  We say there is conflict either, because Davis was a case where there was a single item transferred for a price – shares under a share sale agreement – whereas there were additional terms of value being supplied in Dick Smith and Lend Lease, being the funding of the dividend amount and the development contributions.  The relevant distinction was really illustrated by Justice Colvin in paragraph 186 of his judgment in the Full Court, where his Honour referred to there being another dimension to the arrangements in Dick Smith and Lend Lease which was absent in Davis.

So, the types of analysis undertaken in Dick Smith and Lendlease, we say, would be appropriate where an agreement has another dimension.  Here, that is the case, because we are not simply dealing with agreements that provide for the supply of concentrate.

EDELMAN J:   Is that really to say nothing more than an agreement can have multiple bases, or an agreement can have multiple considerations, in the loose sense?

MS DEARDS:   Yes, an agreement can have multiple consideration, in the loose sense, and in Davis ‑ ‑ ‑

EDELMAN J:   Why would not the majority just be taken, then, when they are talking about a central transaction, just to mean that one of the central focuses of the agreement was?

MS DEARDS:   Yes.  The difficulty was, when they adopted that central transaction test, their conclusion was that, despite the fact that they have acknowledged that what the bottler ultimately wanted to acquire was not – they said it was not for the use of the trademark and the other IP but, rather, the right to distribute famous beverages in Australia, and they acknowledged that the right to use trademarks and intellectual property was a necessary element in the transaction, but because it was not part of the central transaction, it was not the central bargain, then none of the consideration was then decided to be consideration for the use of the intellectual property.

EDELMAN J:   So, you say that they applied a “the consideration” rather than an “a consideration” test?

MS DEARDS:   Yes.  So this central bargain test does not appear in any of the authorities that they were indicating that they were analysing – that is, Dick Smith, Lend Lease and so forth – and the conclusion that they come to seems to be contradicted by what they say in paragraph 36, which is that:

the right to use trade marks and intellectual property was a necessary element in the transaction.

Of course, that is the case.  The soft drinks are not “famous beverages”, as the Full Court described them, unless they are produced in accordance with the proprietary information, bottled in their distinctive containers, and bearing the world‑famous trademark.

STEWARD J:   But that proposition is also true for the milk bar owner who sells Pepsi‑Cola, but it is not suggested, surely, that when they buy Pepsi‑Cola bottles or cans from Schweppes, that part of the payment includes some form of royalty for the licence to sell the cans under Pepsi get‑up.

MS DEARDS:   Certainly not, your Honour.  So, in this case, there was a clear and extensive used by SAPL of the intellectual property that was licensed from Pepsi and SVC.  I have already referred your Honours to the long list of the relevant items in paragraph 333 of the primary judge’s judgment.  In the case of the retailer that your Honour was referring to, that retailer would not have the relevant use of the intellectual property in the same way as SAPL does.

STEWARD J:   They must, in a limited sense, because they are selling the cans with all of the get‑up and trademarked images on them.

MS DEARDS:   Yes, in a very limited sense, your Honour.

STEWARD J:   All right.

MS DEARDS:   So, it would be de minimis, in my submission.  But here, we have a very different scenario, where manufacturing is going on, intellectual property is being used in the manufacturing process, the trademarks are being applied by SAPL, SAPL is using the training manuals to train its staff – there are extensive uses of intellectual property occurring pursuant to these bottling arrangements, your Honour.  So, I think it is very different from a scenario where you have a retailer simply selling on trademarked goods.

BEECH-JONES J:   So, your answer to Justice Steward is it a difference of degree, you say?

MS DEARDS:   Yes.

BEECH-JONES J:   So, at some point the consideration becomes de minimis or too small to be even considered as really being consideration for its use?

MS DEARDS:   Yes, your Honour.  As part of the process of characterisation, one would not come to the conclusion that any part of the monetary consideration was consideration for the use of that intellectual property.

STEWARD J:   What do you say about Mr Wheelahan’s contention that the consideration provided in the EBA was an exchange of promises which included the promises in the performance agreement and the co‑op agreement as part of one overall bargain, but that part of the bargain, he says, was that Pepsi would either sell it itself or cause a subsidiary to sell concentrate for a price that was agreed.  What is wrong with that analysis? There may be something in the agreements which you will take us to, and you might prefer to defer your answer until then.

MS DEARDS:   Yes.  It certainly is the case that there are a series of different promises that are made pursuant to the EBA and there are other contracts entered into between different parties that emanate, in a sense, from the EBAs.  But when one looks at the clauses in the two EBAs in question, it is clear, in my submission, that the role of the intellectual property licence is so significant – and the architecture of the EBAs is such that one would come to the conclusion, as part of a process of characterisation, that the payments that are being made by SAPL are, in part, consideration for the use of that intellectual property.

Perhaps this is a convenient point, your Honours, to turn to the EBAs themselves.  Your Honours can find the PepsiCo EBA in the appellant’s further materials at tab 1.

STEWARD J:   It might be useful to get page numbers, because we do not have tabs.

MS DEARDS:   Page 7.  This is the “Restated and Amended Exclusive Bottling Appointment” entered into in 2009 between Pepsi and SAPL.  One can ignore, for present purposes, the other party to the agreement.  That concerns brands that are not relevant to this case.  Clause 3(a) of this agreement, your Honours, provides that PepsiCo appoints SAPL:

to bottle, sell and distribute the beverages known as and –

under certain trademarks under an “exclusive licence” in Australia.  Note the definition in the second part of the paragraph in 3(a) of “Trade marks”.  There is no controversy that it was not only the trademarks in the form of brand names and logos that were licenced under this agreement but also designs, proprietary information in manufacturing directions and processes, copyrights in advertising and other materials.  Your Honours, again, can see that in the primary judge’s judgment at paragraph 333.

Your Honours, then moving down to clause 4(a), which deals with the supply of concentrate, it provides that Pepsi:

will sell or cause to be sold by one of its subsidiaries –

to SAPL, and SAPL will buy, only from Pepsi or one of its subsidiaries, the concentrate required to manufacture the beverages at certain prices.  Ms Dent’s affidavit, which I will not take your Honours to, but it is in the respondent’s further material at page 48, at paragraph 31 of her affidavit, she lists all the amendments that have been made to the EBAs over time.

These included, your Honours, price amendments.  So, when price amendments were made subsequent to the entry into this agreement – it is a long-term agreement and prices did change from time to time – those amendments took the form of countersigned letters between Pepsi and SAPL, and that was the case even after PBS was appointed as the seller.

Your Honours, in clause 5(a), you will see that PepsiCo warrants that it is the owner of the trademarks and that SAPL will not infringe the rights of any other ‑ ‑ ‑ 

EDELMAN J:   Just before you get to clause 5, is clause 4 a sale clause or is it a promise to sell, or a promise to enter into a contract?

MS DEARDS:   I say that it is a sale clause, your Honour.  There are orders that take place pursuant to the EBA, but the promise here is being made by Pepsi to sell or to cause to be sold the concentrate, and in the event that it appoints a “Seller” – capital S – pursuant to this, then the seller will be – it is a non-party, but will be the company to transfer the title in the concentrate to SAPL when that sale occurs, but the payment obligation that remains under this EBA is a payment obligation, which I will come to, to PepsiCo.

So, my case is that the payment obligation in relation to the concentrate remains a payment obligation, at all times, of PepsiCo’s.  The amounts are in fact paid to a bank account that is held by PBS, but that is pursuant to a payment by direction, which I will come to when I get to proposition 6.

GORDON J:   Is that consistent with 4(c) and (d)?  Under 4(c), it requires and imposes obligations on Pepsi in terms of delivery of the concentrate units, and then 4(d) tells us that Schweppes have to:

carry an inventory of Units equivalent to 45 days’ projected usage –

So that those things themselves show that there is to be something set up in the future?  The reason I ask that is that if you go to – I am sure you are going to take us to – the contracts between Schweppes and PBS, that is, the invoices and the payment of the invoices, taken on their own, they would appear to be a contractual arrangement between two entities at arm’s length.

MR DEARDS:   Your Honour, I dispute that those invoices and orders constitute a contract between PBS and SAPL.  That was not the case that was run below, and my friends have always run a case that the payments that were made were made pursuant to EBAs, not pursuant to some different contract.

EDELMAN J:   So, you say, effectively, that it is common – it has always been common ground that clause 4 is a sale, clause 4 effects the sale, it is not a promise to enter into a purchase or a sale agreement?

MS DEARDS:   That should be the conclusion that is drawn from the case that my friend runs, that there is not a separate contract, yes, your Honour.

STEWARD J:   Can I ask, can that be right, having regard to the concentrate distribution agreement which PBS enters into with the Singapore Pepsi Company, which is appointed distributor of concentrate for Australia, Korea, Vietnam and Thailand?

MS DEARDS:   That is an agreement between the concentrate manufacturer in Singapore and ‑ ‑ ‑ 

STEWARD J:   PBS.

MS DEARDS:   ‑ ‑ ‑ PBS in Australia.  So, that is the purchase by PBS of the concentrate, but we are talking here about the sale by PBS to SAPL.

STEWARD J:   It is appointed to be the distributor in those countries, exclusively.

MS DEARDS:   Yes, by this agreement, by the EBA, we just went to that clause.

STEWARD J:   No, the concentrate distribution agreement appoints PBS to be the distributor within the territory.  So, it must be that the person selling concentrate, who buys it from Singapore where it is made, and sells it to Schweppes in Australia – I have no idea who it sells to in Korea, Vietnam and Thailand – that is the arrangement, is it not?

MS DEARDS:   Yes, it is.  So, it is the case that PBS is transferring title and selling the concentrate, but the payment obligation that subsists under the EBA is a payment obligation, in my submission, to Pepsi.

STEWARD J:   What are the words in the EBA that you rely upon for that?

MS DEARDS:   Your Honours, this moves me into proposition 6 in my outline ‑ ‑ ‑ 

STEWARD J:   All right.

MS DEARDS:    ‑ ‑ ‑ which I will go to now.

STEWARD J:   Answer it when you need to.

MS DEARDS:   No, no, I am very happy to go to it now.

GLEESON J:   Ms Deards, the language of 4(a), the alternative of causing to be sold by one of the subsidiaries, how does that fit with your interpretation?  Are you – does “sold” mean sold, in that context, or does it mean something else?

MS DEARDS:   It does mean sold, your Honour.

GLEESON J:   So, if it is sold by one of the subsidiaries, then it is not being sold by the company, is it?

MS DEARDS:   Yes, it is, here, a bifurcation, so to speak, between the selling of the concentrate and the making of the payment.  So, the payment, in my submission, your Honour – and I will take you to the clauses that I rely on in that respect – the payment is always a payment that is obliged to be made to Pepsi or as Pepsi directs, and that is the case with the SVC EBA as well.

GLEESON J:   But I thought that the proposition that you were putting was that this was a sale, and not merely a promise to sell – that was what was put to you by Justice Edelman.  What I am suggesting to you is that the language of “cause to be sold” by a third party is inconsistent with what you were putting.

MS DEARDS:   Your Honour, if it is inconsistent with what I was putting before – and it is a promise to sell – I do not think that makes any difference, ultimately, to the proposition that there is a disconnect between the sale and the promise to sell and the payment obligation that subsists under the agreement, and that is the critical part.

EDELMAN J:   Unless, of course, the payment obligation under the EBA is providing what the terms will be of the subsequent sale agreement.

MS DEARDS:   The subsequent sale agreement that is entered into between other parties – between PBS and SAPL, is that what your Honour is putting to me?

EDELMAN J:   Yes, the sale agreement contemplated by section 4, clause 4, can still provide, in the payment provisions, for what the payment terms will be for the subsequent sale agreement.

MS DEARDS:   The difficulty there, again, your Honour, is that the case that has always been run here is that the payment was made pursuant to the EBA, not pursuant to some separate contract, and that is the case that we responded to.

EDELMAN J:   I see.

MS DEARDS:   In particular, then, we have responded to that by not running an agency argument or an argument that might emanate from a trust.  So, there were forensic choices that were taken at an early stage by both of us and we are both running cases, as far as I understand it, that the payment that we are concerned with here is being made pursuant to the EBA and not pursuant to some separate contract between PBS and SAPL.

I might continue to take your Honours through the clauses that I say are relevant of the EBAs here, both to illustrate the proposition about the payment obligation but also the centrality of the licence of the intellectual property.  Your Honours will see in clause 6, the bottler was obliged to:

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

So, there was manufacturing directions provided, and in clause 11(a), the bottler was obliged to:

sell Beverages in the Territory in agreed packages and proprietary packages as Company may from time to time specify.

GORDON J:   That is consistent with clause 7(a), about the manufacturing and then distributing?

MS DEARDS:   Yes, your Honour.  Skipping down, your Honours, to clause 24(a)(i) in particular, this provides that Pepsi can terminate on the failure of SAPL to perform in material term, which would include making a payment.  And, clause 24(e)(i), there is a consent to the assignment – of the agreement on the basis of an assignee being:

an appropriate custodian of the Trade marks –

which shows the importance of the trademarks, in that broader sense, to the arrangement from Pepsi’s perspective as well.  Your Honours, clause 27(a), which is headed “Matters arising on termination”, if the agreement is terminated, SAPL cannot use the intellectual property licensed under the agreement.  So, if there is a failure, if there is a termination by reference to a failure to make a payment, the licence comes to an end.

GORDON J:   Can I ask you about a couple of other clauses which are relevant, I think, to this issue – you can tell me if they are not.  Under clause 17, which you did not take us to, it provides that Schweppes:

will sell and distribute Beverages under the Trade marks and will make only such representations concerning Beverages as shall have been previously authorised –

and that it recognised that they have no interest in what they cannot do in the territory, in 17.  In other words, it identifies its permitted activities.

MS DEARDS:   Yes.

GORDON J:   It then provides, in 18 and 19, for what are described as the requirement that they enter into the Co‑operative Advertising and Marketing Agreement and then the performance agreement.

MS DEARDS:   Yes.

GORDON J:   Are they relevant to this question that you are now addressing, about the question of the royalty?

MS DEARDS:   Not in my submission, your Honour.  They are not relevant.  They are relevant in the broader sense, certainly, when we get to DPT, about whether or not the counterfactuals that I am putting forward are reasonable.

GORDON J:   I am only concerned with the royalty argument at the moment.

MS DEARDS:   Yes.

GORDON J:   The reason why I ask that is that, at least on my initial reading of some of the agreements, it is apparent that there are flows of money between PepsiCo and Schweppes, for example, for advertising and direct connection to the trademarks and the way in which the products will be promoted.

MS DEARDS:   Yes.

GORDON J:   Is that not relevant at all to this question about, as you would have it, what is the – I do not want to use the word “substance” – but what is the substance of the payment for?

MS DEARDS:   There was a provision that I adverted to before, your Honour, in the Co‑op A&M Agreement which made it very clear that the payments that were being made by the bottlers towards advertising and marketing were not payments that were being made in relation to the use of the brands.

GORDON J:   We only seem to have the 2009 Co-operative A&M Agreement in the materials.  That does not seem to contain that provision.

MS DEARDS:   Yes.  I think it is referred to, though, in the primary judge’s reasons, in terms of the cross‑examination that took place of Mr Williams.

GORDON J:   It is.  I found that.

MS DEARDS:   Yes.  I think that is the only place your Honour will find that in the materials before this Court.

GORDON J:   Thank you.

BEECH-JONES J:   Ms Deards, that performance agreement referred to in clause 19, that was with the Irish company.

MS DEARDS:   Yes.

BEECH-JONES J:   Was that agreement between the Irish company and SAPL, to your knowledge, or ‑ ‑ ‑

MS DEARDS:   It is between the Irish company and SAPL, yes.

BEECH-JONES J:   Was there any similar agreement between PBS and SAPL?

MS DEARDS:   No, your Honour.

GORDON J:   To the extent – I just want to ask one more question.  It says that the three agreements need to be read together in the way in which the entire agreement is all three agreements.  That is, the EBA, the performance agreement and the co-op agreement.  Does that affect what you just put to us?  In other words, we cannot ignore them, can we?

MS DEARDS:   No, your Honours should not ignore them, but the provision that I referred to in the Co-op A&M Agreement, I think, makes it very clear that the payments that are made pursuant to the Co-op A&M Agreement and the performance agreement are payments that have been made for advertising as part of a shared endeavour between the relevant Pepsi entities and SAPL.  There is a specific acknowledgement in the arrangement that when the bottler does make its contributions pursuant to those arrangements, it is doing so in a way that does not constitute a payment for the use of the brands.

BEECH-JONES J:   This is very technical.  The third line of clause 19, where it says:

all terms of the Performance Agreement including –

What is that first word?  It is something “targets and thresholds”, but ‑ ‑ ‑

MS DEARDS:   Yes.  I am afraid I cannot read it either your Honour, apologies.

GORDON J:   Including minimum targets and thresholds apply?

BEECH-JONES J:   It looks like “minimum”, but there is a comma there ‑ ‑ ‑ 

MS DEARDS:   Yes, although a comma after “minimum” would not make much sense.

BEECH-JONES J:   I will leave that forensic – at least, insignificant – matter for you to find out.

MS DEARDS:   Thank you, your Honour.

GORDON J:   I think the minimums is a reference to minimum annual sales under the performance agreement

MS DEARDS:   Yes, that could be right – “minima.”  Yes, your Honour, thank you.  Your Honours, the other parts of this, I rely on in terms of the payment obligation.  In clause 4(c), your Honours will see that there is a delivery clause here, but – the last line:

Payment in full for each order of Units shall be made by Bottler within 7 days of delivery.

It does not specify to whom the payment is to be made, but if your Honours go to clause 22(b), under the heading “Respective responsibilities,” one can see here that it is PepsiCo, not PBS, who is indemnifying SAPL, even for the product provided by PBS as nominated seller.  It would make no commercial sense, in my submission, if the agreement were one where PBS took all the profits but assumed none of the risks.

All of the warranties here are being given by PepsiCo, and one would imagine that SAPL would not be particularly interested in getting an indemnity from PBS, given that it is a company with very few assets.  Your Honours would have seen, in the primary judge’s judgement at paragraph 125, which refers to the PBS financial statements and profit margin, it made a profit margin of 0.05 per cent and had a very low level of assets.

GAGELER CJ:   Ms Deards, this comes to a point that I think it is appropriate for me to ask a question I have had in mind for a while.  You say that the process in which we are engaged is one of characterisation.

MS DEARDS:   Yes.

GAGELER CJ:   You say that it takes account of a construction of the EBAs, but is not confined to an exercise in construction.  What other considerations, beyond the contractual obligations that are contained in the EBAs, do you say we are to take into account in engaging in the question or in the exercise of characterisation?  Have you crystallised that anywhere?

MS DEARDS:   Yes, your Honour.  It is a broader set of circumstances, including the role of the intellectual property in the manufacturing of the beverages and their value.  So, there was evidence given by the expert that the Commissioner called about the value of the intellectual property – and these brands are amongst the valuable in the beverages industry – and the importance that they have in terms of being able to provide a market for SAPL.  So, those are circumstances, too, that I say ought to be taken into account as part of the characterisation process, in addition to the construction of the provisions of the contract.

STEWARD J:   But how does that sit with the recording of the finding at paragraph 24 in the Full Court that it was not disputed that the amount paid for the concentrate was not “disproportionately high”?

MS DEARDS:   It was not disputed that the amount that was paid for the entire agreement?

STEWARD J:   No, for the concentrate, I think, was the finding at paragraph 24.  I may be wrong.

GORDON J:   It is paragraph 25, I think:

the EBAs fixed a price for future sales of concentrate alone which did not include a component for the licence to use the trade marks and other intellectual property.

STEWARD J:   And the last sentence of 24: 

the Commissioner did not submit . . . that the price charged for concentrate was disproportionately high.

MS DEARDS:   Your Honour, I did not submit that the price paid under the EBAs was disproportionately high or that there was some comparative arrangement where concentrate was being sold for a lower amount so that one would necessarily see a gap that would indicate that there is a royalty.  My case has always been that the amount that is paid under the EBA arrangements is an arm’s length amount that has been settled on by arm’s length parties.  What I say is that there is a payment being made here that has a component of it that is a royalty.

STEWARD J:   When you get to it, when you get a moment, will you address us on the concentrate distribution agreement and the pricing under that?

MS DEARDS:   Yes, your Honour.

STEWARD J:   Thank you.

MS DEARDS:   Your Honours, the way that Justice Colvin approached the characterisation, having regard to the clauses in the respective EBAs, is set out in paragraphs 194 to 198 of his Honour’s judgment.  His Honour found that when regard is had to “the whole of the terms of the EBAs” it is not simply an agreement to supply concentrate.  SAPL secures the licence to be able to sell the branded products to its customers and it does so by the per unit price for concentrate supplied by the EBAs.  That is consistent, your Honours, too, with the reasoning of the majority at paragraph 36, where their Honours found that:

the right to use trade marks was . . . a necessary element –

of the bargain:

to distribute famous beverages –

The fact that Pepsi or SVC could nominate a related entity to be the seller under the EBAs and that the payments that were ultimately made to PBS as the seller does not alter the commercial character of the EBAs or of the payments, and Justice Colvin explained that at paragraph 198 of his judgment.

We would add to the provisions that were relied on by Justice Colvin in that part of his Honour’s reasons that clause 4.1 of the SVC EBA, which I will bring your Honours to, grants the licence subject to SAPL complying with the terms of the payments and the use of the IP.

BEECH‑JONES J:   What clause is that again, sorry?

MS DEARDS:   Clause 4.1.

BEECH‑JONES J:   Thank you.

MS DEARDS:   It is the bottom part of clause 4.1.

GORDON J:   That is of the other EBA, is it not?

MS DEARDS:   Yes, it is.

BEECH‑JONES J:   The Gatorade one?

MS DEARDS:   Yes, the Gatorade or SVC EBA.  That is correct, your Honour.

STEWARD J:   Are you coming to that next?

MS DEARDS:   Yes, your Honours, it is behind – it is at page 27.

STEWARD J:   Thank you.

MS DEARDS:   Your Honours, the parties to this agreement are SAPL and SVC, and clause 3(a) provides that SVC appoint SAPL:

as the exclusive manufacturer . . . seller and distributor of the Gatorade –

in Australia.  PROPEL, the other brand, can be disregarded for present purposes.  In clause 4.1, SVC grants SAPL:

an exclusive royalty‑free licence to use the Intellectual Property within –

Australia to manufacture, distribute and sell the products.  Your Honours will see in the last part of 4.1 that that is, as I said before:

subject to CPSL –

SAPL, or CPSL, as it used to be known:

complying with the terms and conditions of this Agreement –

which, of course, includes the licence.

STEWARD J:   How do you deal with the words “royalty‑free”?  Is that not an expression of the agreement the parties have reached?

MS DEARDS:   Yes, it is, your Honour, but in the context of the entire agreement and the importance of the intellectual property licence to the arrangement, our submission is that one would read this reference to “royalty‑free” to be a reference to no additional royalty payment.

EDELMAN J:   It is not how Justice Colvin read it, is it?  He reads it as somehow royalty‑free in the hands of the recipient.

MS DEARDS:   Your Honour, I will have to go back to ‑ ‑ ‑

EDELMAN J:   I am not sure how I understand how it is royalty‑free in the hands of the recipient.  Maybe I am misunderstanding Justice Colvin’s reasons.

MS DEARDS:   Is your Honour referring to Justice Colvin’s finding at paragraph 203?

EDELMAN J:   No, I was thinking of 198.  It says:

when received by the Related Entity, it was not received by that party as a royalty.

MS DEARDS:   I think, here, his Honour is dealing with a slightly different issue, which is the character of the payment as it is received by – as it would be consideration for in terms of the payment under the EBA, as opposed to the receipt by PBS in its bank account.  I do not think he is dealing with the language that we have just seen in clause 4.1.  I think his Honour does deal with that language when he gets to paragraph 203 of his Honour’s reasons.  In the third sentence he says:

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.

Which I read, your Honours, as being consistent with the submissions that I made in answer to Justice Steward’s question before.  Your Honours will see at clause 6.3 in the SVC EBA that there are warranties and indemnities given by SVC, principally in relation to the use of its intellectual property.  In clause 7.1, SVC:

agrees to sell or cause –

a related entity to sell, acting as its agent, all of the requirements for the SMP – SMP is concentrate.  Clause 18.2 provides that SVC can terminate if SAPL commits a material breach, which would include failing to pay, and any non‑payment would be a material breach.  In clause 18.5(b)(ii) – this is a clause headed “Effect of termination” – (b)(ii) provides that SAPL’s licence to use SVC’s intellectual property ceases if the arrangement is terminated.

GORDON J:   In terms of the construction and characterisation exercise, other than clause 4.1, which is the royalty‑free clause, are there any differences in substance between them?

MS DEARDS:   Between the two EBAs, your Honour?  Yes.  The other difference, I would, say is in clause 7 of the SVC EBA.  So, your Honours, in 7.1(a) there is a provision there that I just your Honours to a moment ago, saying the:

Company agrees to sell or cause to be sold by a Related Corporation . . . acting as agent of Company –

So, there is a reference there to an agency that is not in the Pepsi ‑ ‑ ‑

GORDON J:   Thank you.

MS DEARDS:   I will come back to that. 

GAGELER CJ:   Ms Deards, have you finished with this EBA?

MS DEARDS:   Your Honour, I will need to come back to it in a moment.

GAGELER CJ:   I am just thinking of the morning adjournment.  Would it be convenient to take it now?

MS DEARDS:   It is a convenient time, your Honour.

GAGELER CJ:   Yes, thank you.

AT 11.16 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.30 AM:

MS DEARDS:   Your Honours, can I make a submission in relation to the concentrate distribution agreement that Justice Steward asked me about before the morning break.  It is to be found in the respondent’s book of further material, and it begins at page 177.

Your Honours, this is an agreement between CMSPL, the concentrate manufacturer located in Singapore, and PBS, the Australian Pepsi entity – incorporated in Australia, at least.  Your Honours will see that the payments that are made pursuant to this agreement are dealt with in article 3 of the agreement, which is on page 181.  It provides that:

PBS will purchase Concentrate from CMSPL at the price equal to PBS’s sales prices –

That is, the prices that are set by the EBA:

less a distribution discount . . . determined in accordance with Section 3.2.

And ‑ ‑ ‑

EDELMAN J:   Which clause is this?

MS DEARDS:   I beg your pardon, your Honour.  It is clause 3.1 on page 182 of the bundle.  So, it takes the price that is set under the EBA, and it applies a distribution discount in order to come to the price under this agreement, and that is set by reference in clause 3.2 to the:

Arm’s Length Standard.

And the evidence below was that the margin that is set here was a margin of 0.05 per cent.

STEWARD J:   Can I ask you – I mean, the reason why I raised this with you, Ms Deards, admittedly this is obviously between related parties.

MS DEARDS:   Yes, your Honour.

STEWARD J:   But if all this – PBS pays for the concentrate, is everything it receives less a discount?  It is harder to see where there is room for the royalty in what Schweppes then is paying PBS, because it seems to be all bound up with, ultimately, sending the money to Singapore where the concentrate is made.

MS DEARDS:   Yes.  These are arrangements, though, as your Honour has indicated, between related parties.  In my submission, the better way of looking at this is the EBA, which is between unrelated parties, to undertake the process of characterisation as to what the payments made pursuant to the EBA are for.

STEWARD J:   Can I ask you just another bigger picture question, which is if you are right that, under the EBA, Schweppes had an obligation to pay Pepsi, and that the payments into the Singapore bank account were at the direction of Pepsi, does that mean that PBS has wrongly included in its assessable income the money it has received from Schweppes, and will it get a compensating adjustment?

MS DEARDS:   I thought your Honour might ask me about PBS’s tax position.

STEWARD J:   I am very predictable, I am sorry.

MS DEARDS:   It does not arise for consideration on the appeal, of course, and one would need further evidence on the relationship between PBS, on the one hand, and PepsiCo and SVC, on the other, in order to determine that issue. 

STEWARD J:   But I thought it was common ground that PBS has been including in its taxable income cash payments that are made by Schweppes to the single bank account.

MS DEARDS:   Yes.  That is absolutely right, and it may be that when the situation is properly analysed, the amounts received by PBS should not have been included in PBS’s assessable income.

STEWARD J:   Does PBS also – you may not know the answers – receive – has it been including, in its assessable income in Australia, proceeds from sales to Korea, Vietnam, Thailand?  Do we know? 

MS DEARDS:   I do not know the answer to that question, your Honour.

STEWARD J:   All right.  Thank you. 

MS DEARDS:   All I do know is that it has been including in its assessable income, at least, the payments that it receives from SAPL, pursuant to this EBA, and that it is claiming deductions and leaving a margin taxable in Australia of 0.05 per cent.

STEWARD J:   Which is the arm’s length discount. 

MS DEARDS:   Which is what is described as being the “arm’s length discount” here.  So, that is what has been subject to tax in Australia, your Honour.  If there is some kind of other arrangement between PBS, on the one hand, and PepsiCo and SVC, on the other, as opposed to CMSPL –because, obviously, PBS has agreed to be nominated to take on a particular role under the EBA – then I do not know what the details of that arrangement are, and I would need to understand that in order to go through the proper process of characterisation to work whether or not those amounts had been properly included in the assessable income.  So, I could not answer the question about whether or not there would be some adjustment, if I was right. 

Your Honours, the last proposition in my oral outline relates to the notice of contention, which raises the issue of principal purpose.  Each of the judges of the Federal Court found below that if the taxpayers obtained a tax benefit, it was reasonable to conclude that they entered into the EBAs

for a principal purpose of reducing Australian withholding tax or reducing Australian tax as well as foreign tax.  Your Honours will see that in paragraph 465 of the trial judge’s reasons and in paragraphs 133 and 218 of the Full Court’s reasons.

I will make two observations in relation to purpose, because I have gone rather over time.  The two most important factors in relation to purpose, from the Commissioner’s perspective, of all of the factors that are required to be taken into account in 177D, are “manner”, the first factor; and “form and substance”, the second factor.

STEWARD J:   When you say “from the Commissioner’s perspective”, and I have heard this before – are we not concerned with what the law’s perspective here is?

MS DEARDS:   In my submission, they are the most important factors on the facts on this case, your Honour, not more generally.

STEWARD J:   All right.  Got it.

MS DEARDS:   I think it is probably fair to say that my friend puts the case that manner is the most important factor, and I put the case that form and substance is the most important factor, but I have something to say about manner as well.  I will begin with manner, given that it is the first factor and is identified in section 177D(2)(a).

GAGELER CJ:   How long will this submission take?

MS DEARDS:   Your Honour, I note the time.  It would probably take me about 10 minutes.

GAGELER CJ:   Mr Wheelahan, how are we going for time?

MR WHEELAHAN:   Your Honour, I expect I will need two and a half to three hours.

GAGELER CJ:   We will adjourn until tomorrow morning.

MS DEARDS:   May it please the Court.

AT 4.15 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 3 APRIL 2025