The Central Company for the Production of Soft Drinks Ltd. holds exclusive rights to distribute Coca-Cola products in Israel.
The dispute arose when the tax authorities classified part of the payments made by the company to Coca-Cola as royalties for the use of Coca-Cola’s trademarks and intellectual property, making them subject to withholding tax.
The company appealed to the district court, arguing that no portion of the payments constituted royalties. Instead, they argued that the payments were solely for the concentrates utilized in the production of beverages and that the tax authority had not previously classified them as royalties.
Judgment
The court ruled that the payments involved the use of Coca-Cola’s intellectual property and were therefore correctly classified as royalties by the tax authorities. It dismissed the company’s appeals for the years 2010-2017 and upheld the tax assessments, requiring the company to pay the withholding taxes on the royalty payments.
Excerpts in English
“15. Moreover, even if I assume in favor of the appellant and Coca-Cola that Coca-Cola’s operating method with manufacturers and distributors in various countries, including Israel, is designed to reduce the need to transport large quantities of sugar and water to save on production costs of Coca-Cola beverages, this does not alter the conclusion that producing the final beverage from Coca-Cola concentrates and the additional ingredients required involves the operation of large-scale and significant machinery and workforce.
16. Support for my above conclusion can be found in the legal principle established in Civil Appeal 1960/90 Pesid Tax Assessor Tel Aviv 5 v. Re’ayonot Ltd. (published in Nevo), where the primary test for “manufacturing activity” is met when the taxpayer produces “one tangible item from another tangible item” (ibid., section 6). In our case, it appears that this test is met since the appellant produces various types of Coca-Cola beverages (tangible) from Coca-Cola concentrates and other ingredients (other tangible items). It should be emphasized that there is no doubt that the concentrates purchased by the appellant from Coca-Cola suppliers cannot be sold as Coca-Cola beverages without the production/mixing processes and additional actions carried out by the appellant at its factory, even before the marketing and distribution activities begin.
Additionally, the test regarding the production of a tangible product is narrower than the “economic enhancement” test and the “extent of use of the final product” test, both of which are also intended to determine whether a manufacturing activity is involved. Given the circumstances described above, these tests are certainly met with regard to the appellant’s production of Coca-Cola beverages, both in terms of turning the concentrate into Coca-Cola and in terms of the large volume of Coca-Cola beverages produced and marketed by the appellant.
Furthermore, the appellant itself acknowledges that it sells as a manufacturer according to various tax laws (see section 191 of the summaries), which further strengthens the conclusion that the appellant manufactures Coca-Cola beverages.
17. Considering all of this, I must reject the appellant’s claim that it purchases a finished product from Coca-Cola and conclude that the appellant manufactures Coca-Cola beverages in Israel, where the raw materials required for the production of Coca-Cola beverages are supplied by Coca-Cola or according to its instructions.
18. In light of my conclusion that the appellant manufactures Coca-Cola beverages in Israel and does not purchase a finished product, it necessarily follows that the marketing of the beverages manufactured by the appellant, while using the goodwill and trademarks of Coca-Cola — an economic asset of significant value — requires payment of royalties for the use of these assets. This is customary and standard practice when a brand owner grants a manufacturer and marketer a license to use its trademarks and goodwill for marketing and selling the product produced by the manufacturer.”
…
“43. The appellant’s claim that the assessment for the tax years 2010 and 2015 has expired due to alleged procedural flaws by the assessor during the extension of the assessment period does not justify the cancellation of the assessment for those years. A flaw in an action or decision by the tax assessor does not necessarily invalidate the action or decision. Instead, it requires examining the nature of the flaw and the harm caused to the taxpayer versus the harm to the public interest if the decision is canceled (relative nullification). In this case, even if I were to accept the appellant’s claim that there were flaws in extending the assessment period, this is a procedural matter that did not affect the appellant’s reliance, as it was aware of the respondent’s position that it should be liable for withholding tax on royalties, including the assessment discussion based on the Tax Authority expert’s opinion dated 29.12.2016 (Section 60 of the closing arguments). Considering the unique circumstances and the precedent of charging royalties in the transaction between the appellant and Coca-Cola, as well as the significant harm to the state’s coffers and the violation of the principle of equality among taxpayers, it seems that the balance leans towards not canceling the assessments for the tax years 2011-2010.”
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