M/S PEPSI FOODS LTD.versusCOLLECTOR OF CENTRAL EXCISE, CHANDIGARH

A                           MIS PEPSI FOODS LTD.
                                        v.
               COLLECTOR OF CENTRAL EXCISE, CHANDIGARH

                             NOVEMBER 25, 2003

B    (P. VENKATARAMA REDDI AND DR. AR. LAKSHMANAN, JJ.]

         Central Excise and Salt Act, 1944 : Section 4(a).

         Excise Duty-AYs 1992-93 and 1993-94-Sole consideration for
C sale-Royalty amount-lnclusibility of-Jn assessable value of goods-
  Assessee sold 'concentrate' to bottlers :Jut ofwhich the bottlers manufactured
   soft drink beverages-Assessee collected royalty amountfi·om these bottlers
  /or use of its trademark-Held : The sale of 'concentrate' and payment of
   royalty were integral operations and could not be dissociated from each ·
D other-The invoice price of 'concentrate' alone was not the sole
  consideration for sale of 'concentrate 'c.-Jt also included royalty amount-
   Hence, royalty amount includible in the assessable value ofthe 'concentrate'.

         Words and Phrases :
           '
E         "Sole consideration for sale"-Meaning of-Jn the context of S. 4(a)
    of the Central Excise and Salt Act, 1944.

        The appellant-assessee sold 'concentrate' to the bottlers out of
    which soft drink beverage under the trademark 'lehar' was
F   manufactured by the said bottlers. The appellant and the bottlers were
    governed by an agreement under which the appellant received royalty
    amount from the bottlers, calculated at a certain percentage of the
    beverage bottles despatche8 from the plant.

         The appellant filed pricelists of their product for the A Ys 1992-
G 93 and 1993-94 before the Assistant Collector of Central Excise and
    Customs who propose<! to inclu_de the royalty amount in the assessable
    value of the 'concentrate' and demanded duty on that basis.

         The adjudicating officer took the view that the sale of the
H   'concentrate' was interlinked with the royalty charges inasmuch as the
                                       232
                     PEPSI FOODS LTD. v. C.C.E.                    233

'concentrate' was sole only to those who agreed to pay for the brand A
name. The appellant Collector rejected the appellant's appeal, which
was upheld by the Central Excise, Customs and Gold (Control)
Appellate Tribunal. Hence the appeal.

     On behalf of the appetlant, it was contended that the sale of B
'concentrate' by the appellant to the bottler and the collection of
royalty from the bottler for the use of the trademark were two different
transactions and there was no nexus between them; that the payment
of royalty was directly related to the use of the trademark and that
the royalty was paid when the bottle was moved out from the plant
of the bottler and it had nothing to do with the sale value of the C
'concentrate'

     The following question arose before the Court :

      Whether the royalty amount collected by the appellant-assessee D
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 'concentrate'?

     Dismissing the appeal, the Court
                                                                         E
      HELD : 1.1. The Agreement between the appellant-assessee and
the bottler sets in motion a series of steps aimed at promoting the
appellant's business in collaboration with the bottler and also realizing
the royalty. The agreement makes it clear that the realization ofroyalty
was as important as the realization of the sale price of the concentrate F
from the assessee's point of view. In reality and in substance, the
component of royalty cannot be dissociated from the ostensible
consideration for the sale 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 G
to purchase the 'concentrate' from the assessee and assessee ~lone, use
the trademark of the assessee on the bottled beverage in addition to the
trademark of Pepsico and comply with tht> instruction 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 H
      234               SUPREME COURT REPORTS (2003] SUPP. 6 S.C.R.

A bottler to purchase the 'concentrate' exclusively from the assessee and
      the user of trademark of the assessee subject to payment of royalty. The
      royalty, which is realizable as a consideration for authorizing the use
      of the trademark, cannot, therefore, be viewed in isolation. The
      appellant's sale of'concentrate', the bottler's manufacture of beverages
B     out of that and the sale thereof by using the assessee's trademark are
      all integral operations. (237-F-H; 238-A-H; 239-A-FJ

           1.2. The assessee very well visualized that the consideration in the
      form of royalty would flow to it by virtue of the supply of the
      'concentrate'. The substratum of the agreement regulating the terms
C     of dealings between the parties unmistakably indicate that the invoice
      price alone was not the sole consideration for the sale of 'concentrate'.
                                                                    (239-G-H)

           2.1. The fact that the royalty is charged for permitting the use
      of the trademark, but not as part of price for specific units of
D     '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. (240-A]

E           2.2. 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 prefind royalty
      charges is inseparable from on another. [i40~B-C)

F '        Union of India v. Mahindra & Mahindra Ltd., (1995) 76 E.L.T. 481
      SC, Collector of Customs, Bombay v. Maruthi Udyog Ltd., (1987) 28
      E.L.T. 390 and Duke & Sons v. Commissioner of Central Excise, (1991)
      55 E.L.T. 577, held inapplicable.

           CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4051 of
G     1996.

         Froffl the Judgment and Order dated 18.10.95 of the Central Excise
    Customs and Gold (Control) Appellate Tribunal, New Delhi in F.O. No,
    536 of 1995-A.

H                                      WITH
                PEPSI FOODS LTD. v. C.C.E. [REDD!, J.]               235

     C.A. No. 1385 of 1999.                                                A
     V. Lakshmikumaran, Madhav Rao, Ashok Yadav and D.N. Mehta for
Ms. Suruchi Agarwal for the Appellants.

   Dileep Tandon, K.C. Kaushik for B.K. Prasad, U.A. Rana and Arvind
Kumar for the Respondent                                                   B
     The Judgment of the Court was delivered by

     . P. VENKA TA RAMA REDDI, J. The question raised ii1 these
appeals filed by the assessee under Section 35L(b) of the Central Excise C
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 aP,pellant 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 D
terms of which we shall advert to later.

      For the period· l .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 thei~product. On E
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 inclusipn of the royalty charges in the F
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 G
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 fui1her appeal to the H
     236                SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.

A    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:

             "It is thus plain that the licence to use the appellant's trademark
             is granted to the bottlers bound up with obligation to purchase the
B
             concentrate only from the appellants. The two are inextricably
             inte11wined. 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 appelh;mt's trademark on the beverages manufactured by the
C·           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.
D
        The learned counsel for the appellant strenuously contended th~t 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
E 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 ~xcise duty is paid by the bottler on the price inclusive
F of royalty. Though this fact by itself has no bearing on the question
  involved, according to the learned counsel, i! 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
G 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 of2.75% of the MRP on each bottle flows back
H to the appellant. It is contended that the sale of beverage base is inextricably
..                    PEPSI FOODS LTD. v. C.C.E. [REDDL .I.)
                                                                    j.,
                                                                             237

     linked to the use of the trademark on the beverage bottles when sold and A
     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 ot".1aluation of excisable goods for the
     purpose of charging the excise duty. When such duty is chargeable under B
     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 nonnal 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 C
             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 Jays down that-                                                              D
              "where the nonnal 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."
                                                                                    E
            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 authority resorted to valuation in accordance with the valuation
     rules.
                                                                                    F
           The crucial question is whether the price charged by the asse;see 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 G
     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 questioc whether
     the price of concentrate has been understated. Even in the absence of such
     a contingency, the last clause of Section 4(1)(a) would come into play and
     if under the terms of Agreement, an extra consideration would eventually H
    238               SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.
                                                                                   I
A   flow back to the assessee/manufacturer as an inevitable consequence ·of            "'.
    sale of ~oncentrate, it cannot then be said that the price is the sole
    condsideration for sale. However, there should be intimate nexus between
    the sale and realization of rdyalty.

           Now, let us turn to the salient features of Agreement in order to
B
    ai;preci<1te 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
C 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 of2.75% of the maximum retail price of the
D 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 bottier shall
E 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
F conditions established by the seller. The bottkr 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
G 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 trademai:ks, names, symbols, emblems or designs of the
H assessee Company. Fu11her, on such termination, the assessee Company
                   PEPSI FOODS LTD. v. C.C.E. [REDD!, J.]                   239

  shall have the right to purchase from the bottler any part or all of the A
 . bottler's beverage bottles, crowns, labels, containers, cases, cartons, unused
   advertising material and concentrate at the invoice price less a reasonable
   all0\1\-'ance 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 B
   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 C
  the realization ofroyalty was as important as the realization of the sale price
  of the concentrate from the assessee'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 D
  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 E
  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, F
· 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 G
  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.                                H
    240                SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.

A        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 s0ld
    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.
B         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 15 inseparable from one
    another.
c
          lt is however contended that in respect of Soda manufactured by the
    bottiers 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
D   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 t~e inclusion of royalty received on
    the sales "of soda by the manufacturer. The documents relating to the
E   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.
F
         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.

G         The first case relied upon is the Union of India v. Mahindra &
    Mahindra Ltd., (1995) 76 E.L.T. 481 (S.C.). This case was rightly
    distinguished by the Tribunal. lt 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
H
                 PEPSI FOODS LTD. v. C.C.E. [REDDI, J.]                241

the supply of CKD packs to the respondents by PEUGEOT for the A
production of the engine. This 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 B
        of the spare parts thatmay 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 C
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           D
distinguishing features are many and the appellant cannot draw any support
from that case.

     The decision ofCEGAT in Collector ofCustoms, Bombay v. Maruthi
Udyog Ltd., (1987) (28) E.L.T. 390 has also been relied upon. The special E
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 F
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 G
and vehicles from Japan". The ratio of that decision of CEGAT thus stands
6h a different footing.

     One more case on which reliance was sought to be placed by the
appellant's coi,msel is the order of CEGAT in Duke & Sons v. Commissioner H
    242                 SUPREME COURT REPORTS (2003] SUPP. 6 S.C.R.
A of Central Excise, (1991) (55) EL T 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 observations:
B            "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 exp,ressed 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
c            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
D            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."
E 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
F   appeals. However, we leave it open to the assessee to raise any question
    as to the computation i.e., the quantum of royalty inc!Udible, 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
G observation.

    v.s.s.                                                   Appeals dismissed.