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CASE NO.: Appeal (civil)  4051 of 1996 Appeal (civil)  1385 of 1999

PETITIONER: M/s Pepsi Foods Limited                          

RESPONDENT: Collector of Central Excise, Chandigarh   

DATE OF JUDGMENT: 25/11/2003

BENCH: P. VENKATARAMA REDDI & Dr. AR. LAKSHMANAN.

JUDGMENT: JUDGMENT

P. Venkatarama Reddi, J.

       The 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.         For 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.  We are 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: "\005It 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

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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."\005

       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. The 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. Section 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\027 "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.                                                 (emphasis supplied)

The provisos are not relevant for our purpose.    Clause  (b) of Section 4 lays down that\027 "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.   The 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

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authority resorted to valuation in accordance with the  valuation rules. The 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. Now, let us turn to the salient features of Agreement in  order to appreciate the issue in its proper prspective.  The 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.  Further, 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

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distributors fully comply with all the terms and conditions of  the agreement relating to the sale and distribution of the  beverage. It is 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. The 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. Under 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. It is 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.  According 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

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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. In our 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. The first case relied upon is the Union of India Vs.  Mahindra & Mahindra Ltd. [1995 (76) E.L.T. 481  (S.C.)]. This case was rightly distinguished by the Tribunal.  It was 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.  This Court observed\027 "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. The decision of CEGAT in Collector of Customs,  Bombay Vs. Maruthi Udyog Ltd. [1987 (28) E.L.T. 390]  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".  The ratio of that decision of CEGAT thus stands on a  different footing. One more case on which reliance was sought to be  placed by the appellant’s counsel is the order of CEGAT in  Duke & Sons Vs. Commissioner of Central Excise  [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

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observations: "The agreement under which the buyers are  permitted to use the trademark is not filed either  before the lower authorities or before us.  Therefore, 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.  In 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. In the 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. The appeals are dismissed without costs subject to the  above observation.