Pepsi Foods Limited Vs. Collector of Central Excise, Chandigarh  Insc 593 (25 November 2003)
Reddi & Dr. Ar. Lakshmanan. P. Venkatarama Reddi, J.
Appeal (civil) 1385 of 1999
question raised in these appeals filed by the assessee under Section 35L(b) of
the Central Excise Act is whether the royalty amount collected by it from the
bottlers for use of the trademark 'lehar' on the soft drink beverages
manufactured out of the 'concentrate' sold by the appellant is includible in
the assessable value of the concentrates. The appellant and its buyers
(hereinafter referred to as 'the bottlers') are governed by an agreement
captioned as "PFL Bottling Appointment and Trademarks Licence Agreement With
Bottlers", the terms of which we shall advert to later.
the period 1.9.1992 to 31.3.1993 (which is covered by C.A.No.4051 of 1996) and
for the period 1.4.1993 to 31.12.1993 (which is covered by C.A.No. 1385 of
1999), the appellant filed pricelists of their product. On perusal of the
details furnished with the pricelist, the Department became aware of the fact
that royalty charges were being received by the appellant under the terms of an
agreement permitting the use of trademark 'lehar'. The Assistant Collector of
Central Excise and Customs, Patiala issued
show cause notices proposing the inclusion of the royalty charges in the
assessable value and demanding duty on that basis.
not concerned here with the advertising expenses which was also the subject
matter of show cause notices issued for the earlier period. The objections
filed by the appellant-assessee were overruled by the adjudicating authority
and orders were passed approving the pricelists subject to the addition of
royalty charges and advertising expenses and demanding differential duty for
the clearances made during the said period. The adjudicating officer took the
view that the sale of the concentrate was interlinked with the royalty charges
inasmuch as the concentrate is sold only to those who agree to pay for the
brand name. The appellate Collector rejected the assessee's appeal and
confirmed the order of adjudication. On further appeal to the Tribunal, no
relief was granted as regards the royalty charges though the appeal was allowed
in regard to the other disputed items. The Tribunal observed thus:
is thus plain that the licence to use the appellant's trademark is granted to
the bottlers bound up with obligation to purchase the concentrate only from the
appellants. The two are inextricably intertwined. The agreement with the
bottlers is thus an indivisible and composite agreement for the sale of
concentrate to them by the appellants and for the grant of licence to them for
the use of the appellant's trademark on the beverages manufactured by the
bottlers." This decision of the Tribunal which is the subject matter of
appeal in C.A. 4051 of 1996 was followed by the
Tribunal in respect of the subsequent period. C.A. No. 1385 of 1999 is
preferred against that order.
learned counsel for the appellant strenuously contended that the sale of
concentrate by the appellant to the bottler and the collection of royalty from
the bottler for the use of the trademark are two different transactions and
there is no nexus between them. The payment of royalty is directly related to the
use of trademark and it is realized as a percentage of the maximum retail price
of the soft drink sold by the bottlers. Thus, royalty is paid when the bottle
is moved out from the plant of the bottler and it has nothing to do with the
sale value of the concentrate. In fact, the bottlers while fixing the M.R.P.
take into account the royalty paid to the appellant and the excise duty is paid
by the bottler on the price inclusive of royalty. Though this fact by itself
has no bearing on the question involved, according to the learned counsel, it
would only indicate that there was no loss of revenue. The counsel for the
appellant laid emphasis on the fact that the royalty is being collected on the
sales of soda effected by the bottler with the trademark of the assessee though
the base material was not supplied by the assessee. Both the counsel have
relied on the terms of the agreement to buttress their arguments. The counsel
for the respondent has relied on the findings of the Tribunal and contended
that the price at which the beverage base is sold to the bottler is not the
sole consideration and an additional consideration of 2.75% of the MRP on each
bottle flows back to the appellant. It is contended that the sale of beverage
base is inextricably linked to the use of the trademark on the beverage bottles
when sold and they are not independent transactions.
4 of the Central Excise and Salt Act, 1944 (as it stood at the relevant time)
lays down the mode of valuation of excisable goods for the purpose of charging
the excise duty. When such duty is chargeable under the Act with reference to
the value of the goods, the value shall, subject to the other provisions of the
Section, "be deemed to be the normal price" thereof, that is to say
"the price at which such goods are ordinarily sold by the assessee to a
buyer in the course of wholesale trade for delivery at the time and place of
removal, where the buyer is not a related person and the price is the sole
consideration for the sale.
supplied) The provisos are not relevant for our purpose. Clause (b) of Section
4 lays down that "where the normal price of such goods is not
ascertainable for the reason that such goods are not sold or for any other
reason, the nearest ascertainable equivalent thereof determined in such manner
as may be prescribed.
manner of ascertainment of the value in terms of clause (b) is provided for by
Central Excise (Valuation) Rules. On the premise that the price is not the sole
consideration for the sale of concentrate, the Central Excise authority
resorted to valuation in accordance with the valuation rules.
crucial question is whether the price charged by the assessee at the time of
sale of concentrate to the bottlers represents the sole consideration for the
sale or whether, apart from the invoice price, any other monetary consideration
was contemplated by the parties is the question? In other words, can it be said
that the realization of the royalty at the agreed rate from the bottler was
essential part of the bargain that led to the sale of concentrate? The answer
to this does not depend on the question whether the price of concentrate has
been understated. Even in the absence of such a contingency, the last clause of
Section 4(a) would come into play, if under the terms of Agreement, an extra
consideration would eventually flow back to the assessee/manufacturer as an
inevitable consequence of sale of concentrate. However, there should be
intimate nexus between the sale and realization of royalty.
let us turn to the salient features of Agreement in order to appreciate the
issue in its proper prspective.
Agreement is captioned as "PFL Bottling Appointment and Trademarks Licence
Agreement With Bottlers". The assessee Company grants licence to use the
trademark 'Lehar' in conjunction with the trademarks called 'Pepsico Marks'
owned by Pepsico Inc., USA. This licence is in respect of
beverage products. Certain territory is assigned to each bottler and the
bottler can use the said trademark within the territory. In consideration of
the licence granted for use of the trademark, the bottler shall pay a royalty
at the rate of 2.75% of the maximum retail price of the beverage as notified by
the bottler. The royalty will be payable at the above rate for each bottle of
the beverage dispatched by the bottler from the plant. The royalty shall be
paid to the assessee Company at New Delhi within 15 days of the end of each calendar month in respect of sales
made during such calendar month. At the end of each financial year, the bottler
shall submit an audit certified statement showing the amounts payable by the
bottler towards royalties. The bottler shall buy all units of concentrate
required for the manufacture of the beverage only from Pepsico's approved
manufacturer, PFL (the assessee), or a manufacturer approved in writing by Pepsico
and PFL at a price and in accordance with the terms and conditions established
by the seller. The bottler will strictly follow all instructions and directions
issued by assessee Company from time to time for preparing, bottling, selling
and distributing the beverage including the quality and standards of bottles,
cartons and containers. The bottler will undertake appropriate advertising and
sales promotion activities for the beverage. The agreement shall not create or
to be deemed to create any relationship of agency, partnership or joint
venture. The agreement shall terminate automatically upon the termination of
the arrangement between Pepsico and the bottler for the use of the 'Pepsico
Marks'. Upon the termination of the agreement in the manner provided for, the
bottler will not use any of the trademarks, names, symbols, emblems or designs
of the assessee Company.
on such termination, the assessee Company shall have the right to purchase from
the bottler any part or all of the bottler's beverage bottles, crowns, labels,
containers, cases, cartons, unused advertising material and concentrate at the
invoice price less a reasonable allowance for depreciation. In the event the
bottler appoints wholesale distributors, the bottler will be obligated to
ensure that the distributors fully comply with all the terms and conditions of
the agreement relating to the sale and distribution of the beverage.
fairly clear that the agreement sets in motion series of steps aimed at
promoting the appellant's business in collaboration with the bottler and also
realizing the royalty calculated at a prescribed percentage of the retail price
of every bottle. The agreement, read as a whole, makes it clear that the realization
of royalty was as important as the realization of the sale price of the
concentrate from the assesee's point of view. In reality and in substance, the
component of royalty cannot be dissociated from the ostensible consideration
for the sales of concentrate by the assessee. The assessee would not have
parted with the goods, namely, concentrate if the royalty payment did not enter
into the bargain. The bottler is obliged to purchase the concentrate from the assessee
and assessee alone, use the trademark of the assessee on the bottled beverage
in addition to the trademark of Pepsico and comply with the instructions of the
assessee in regard to manufacture, sale and distribution of beverages. There is
an element of control in respect of the entire business operations of the
bottlers. There exists an inextricable bond between the obligation of the
bottler to purchase the concentrate exclusively from the assessee and the user
of trademark of assessee subject to payment of royalty. The royalty which is realizable
as a consideration for authorizing the use of trademark cannot, therefore, be
viewed in isolation. The appellant's sale of concentrate, the bottler's
manufacture of beverages out of that and the sale thereof by using assessee's
trademark are all integral operations. It is in this background, we have to
judge whether the invoice price is the sole consideration contemplated by the
parties for the sale and purchase of concentrate. The assessee very well
visualized that the consideration in the form of royalty would flow to it by
virtue of supply of the concentrate. In our view, the substratum of the
agreement regulating the terms of dealings between the parties unmistakably
indicate that the invoiced price alone was not the sole consideration for the sale
of concentrate. The finding of the Tribunal is, therefore, unexceptionable.
fact that the royalty is charged for permitting the use of the trademark, but
not as part of price for specific units of concentrate sold does not detract
from the fact that the overall consideration for the sale of concentrate is not
merely its price stated in the invoice. It is something more than that, namely,
royalty to be received periodically.
the agreement, the obligation to buy the concentrate at the price fixed by the
seller (appellant) and the obligation of the buyer to manufacture the bottled
soft drinks, to sell the same by using the trademark of the appellant and to
remit the prefixed royalty charges is inseparable from one another.
however contended that in respect of Soda manufactured by the bottlers on their
own, the appellant collects royalty from them for the use of the trademark 'lehar'
even though there was no sale of any raw material.
to the learned counsel for the appellant, this is a strong indicia that the licence
to use the trademark granted to the bottler in consideration of receiving the
royalty is an independent and distinct transaction. No such specific plea was
raised before any of the authorities including the Tribunal, though there was
demur to the inclusion of royalty received on the sales of soda by the
manufacturer. The documents relating to the collection of royalty on account of
the sale of soda with the trademark of the appellant are not on record. The
circumstances in which such a deal was entered into are not apparent from the
record. We do not, therefore, propose to delve into this aspect further. We may
mention that the appellant's claim for exclusion of royalty received on Soda
sales was accepted by the Tribunal.
view, none of the decisions cited by the learned counsel for the appellant will
come to the aid of the appellant though there are certain overlapping features.
& Mahindra Ltd. [1995 (76) E.L.T. 481 (S.C.)]. This case was rightly
distinguished by the Tribunal.
found as a matter of fact that there was no material to indicate any nexus or
connection between the lumpsum payment of 15 million French Francs paid by the assessee
to the foreign collaborator for providing the use of 'PEUGEOT Engine
Technology' and the supply of CKD packs to the respondents by PEUGEOT for the
production of the engine.
Court observed "In no sense, it can be stated that the price of the goods
obtained later was reckoned or reflected in the lumpsum payments made, long
before. The parties never had in mind the nature and extent of the spare parts
that may be required later, when the collaboration agreement was entered
into." The fact that there was no obligation on the assessee to purchase
CKD packs at all, that long before the supply of the CKD packs and spares, the
royalty due to the collaborators was paid, that there was no material to show
that the supply of the CKD packs or spares weighed with the parties in fixing
the payments under the collaboration agreement were all taken into account by
the Court to conclude that no nexus existed between the lumpsum payment under
the agreement for the technical know-how and the determination of the price for
supply of CKD packs/spares. The distinguishing features are many and the
appellant cannot draw any support from that case.
decision of CEGAT in Collector of Customs, has also been relied upon. The
special leave petition filed against this order was dismissed in limine by this
Court on 26.4.1989 by a non speaking order. This case also does not help the
appellant. In this case, the contention of the Department that the import
invoice price pertaining to components, assemblies and vehicles was not the
sole consideration for the sale but the royalties relatable to the manufacture
in India of Suzuki's components also constitutes the consideration for the
purchase of the imported goods was not accepted. The Tribunal held that the
royalty payments were relatable directly to the manufacture of goods in India and they had no nexus with the
import of goods from Japan. It was observed that "neither
royalty nor the trademark 'Maruthi Suzuki' had anything to do with import of
components, assemblies and vehicles from Japan".
ratio of that decision of CEGAT thus stands on a different footing.
more case on which reliance was sought to be placed by the appellant's counsel
is the order of CEGAT in [1991 (55) ELT 577] which stood affirmed by this Court
by reason of dismissal of S.L.P. That was also a case of franchise fees payable
by the buyers of concentrate to the assessee for using the trademark of the assessee
on the soft drink bottles. The Tribunal made the following crucial
agreement under which the buyers are permitted to use the trademark is not
filed either before the lower authorities or before us.
no views can be expressed as to whether it is interlinked with the sale of
'concentrate'. There is also no evidence on record to indicate that the
'concentrate' is sold only to those who also enter into agreement to buy the
'trademark'. In other words, there is no evidence to establish that the
agreement to purchase trademark is essential before a buyer purchases the
'concentrate'. Similarly, there is no evidence that a buyer is not willing to
purchase the 'concentrate' without purchasing the trademark.
other words, there is no evidence to establish that the sale of concentrate is
dependent on the purchase of trademark. In the absence of such evidence it is
difficult to hold that the sale of concentrate is interlinked or closely
connected and without the sale of trademark there is no sale of
concentrate." It was under those circumstances the royalty payment was
excluded from the assessable value of the concentrate. The distinguishing
features are self-evident from the observations quoted above.
result we affirm the decision of the Tribunal and dismiss the appeals. However,
we leave it open to the assessee to raise any question as to the computation
i.e., the quantum of royalty includible, before the adjudicating authority who
has to recompute the turnover in any case consequent upon the Tribunal granting
partial relief to the appellant.
appeals are dismissed without costs subject to the above observation.