Commissioner of Taxation v PepsiCo Inc

The High Court of Australia considered appeals by PepsiCo Inc and related entities against decisions of the Federal Court of Australia concerning royalty withholding tax and diverted profits tax. The dispute arose from agreements where non-resident companies licensed intellectual property to an Australian company for bottling, selling, and distributing beverages. While no direct royalty payments were made to the non-resident companies, payments were made to their Australian subsidiary for beverage concentrate. The Commissioner of Taxation assessed the non-resident companies for royalty withholding tax and diverted profits tax, arguing that the payments for concentrate effectively included royalties for the use of intellectual property.

The central legal issues before the High Court were whether the payments made to the Australian subsidiary constituted royalties for the use of intellectual property owned by the non-resident companies, as defined by section 6 of the *Income Tax Assessment Act 1936* (Cth) ("ITAA 1936"). Further, the Court had to determine if these amounts were "paid or credited to or derived by" the non-resident companies within the meaning of section 128B of the ITAA 1936, making them liable for royalty withholding tax. Finally, the Court was required to assess whether the non-resident companies were liable for diverted profits tax under section 177J of the ITAA 1936, considering the principal purpose of the scheme and whether a tax benefit was obtained.

The High Court found that the evidence did not support the Commissioner's contention that the principal purpose of PepsiCo in entering into the scheme was to obtain a tax benefit. Furthermore, the Court concluded that no such tax benefit was actually obtained. Consequently, the appeals were dismissed with costs.