Exclusive Privilege to Use Duncan Yo-Yo Molds

October 3, 1960 BIR RULING NO. 433-60 Messrs. Stewart, Cunanan & Co. 107 13th Street, Port Area P. O. Box 2288 M a n i l a Gentlemen : This is with reference to your letter dated December 14, 1959, wherein you requested this Office to issue a ruling on the following query: aisadc "Our client, DUNCAN, RUSSELL & IVES, S. A. (hereinafter called DRI), a foreign corporation licensed to engage in business in the Philippines, entered into two separate agreements with two domestic corporations, the San Miguel Brewery, Inc. and the Union Manufacturing Company, Inc., concerning the promotion of Coca-Cola by means of Duncan Yo-Yo contests. The terms of the agreement with San Miguel Brewery, Inc. are as follows: "(a) Publicity will first be given to the Duncan Yo-Yo so that interest will be created for the Coca-Cola Yo-Yo; "(b) DRI will loan its campaign manager to the San Miguel Brewery who will supervise the production of the Duncan Yo-Yo to be undertaken by the Union Manufacturing Company, which was licensed by DRI to produce said toy; "(c) DRI campaign manager will prepare, in collaboration with the San Miguel Brewery Inc. and the Coca-Cola Export Corporation, the details of the whole promotion; "(d) DRI will also loan Yo-Yo experts to the San Miguel Brewery, Inc., to assist in the demonstration and the organizing of contests. "(e) In consideration of the foregoing, the San Miguel Brewery, Inc., will pay DRI the sum of P0.32 per yo-yo for the first one million Coca-Cola Yo-Yo sold, and in excess of one million, the sum of P0.36 per yo-yo." "The Union Manufacturing Company, was licensed by our client to produce the DUNCAN YO-YO from Duncan Yo-Yo molds to be loaned by DRI to San Miguel Brewery, Inc. and under the supervision of the DRI campaign manager mentioned above. The molds will be used to produce Duncan Yo-Yos only; Duncan Yo-Yos trade-marked Coca-Cola to be sold to San Miguel Brewery, Inc. only; and standard Duncan Yo-Yos to be sold to retail stores or jobbers. The DRI campaign manager will also supervise the production of the Duncan Yo-Yo replacement strings to be sold to San Miguel Brewery, Inc. at the rate of P0.08 per package of 2 strings and to the retail trade at P0.11 per package of 2 strings. Inconsideration of the foregoing, the Union Manufacturing Company will pay our client in the following manner: "(A) For all Duncan Yo-Yos purchased by the San Miguel Brewery, Inc. there will be no charge; "(B) For all Duncan Yo-Yos sold to others there will be a charge of P0.35 per Yo-Yo. "(C) For all replacement strings sold to the San Miguel Brewery, Inc. or jobbers there will be a charge of P0.04 per package of 2 strings. "(D) In the event the actual cost of producing a package of strings is over P0.03 the rate of royalty will be re-negotiated. In reply thereto, I have the honor to inform you that under the abovestated circumstances, your client, Duncan, Russel & Ives, S.A. is not subject to any business tax. According to the aforementioned agreement, your client merely grants the Union Manufacturing Company, Inc., exclusive privilege to use its Duncan Yo-Yo molds in the manufacture of standard Duncan yo-yos and Duncan yoyos trademarked coca-cola to be sold to San Miguel Brewery only, supposedly for the purpose of advertising and consequently increasing the sales of coca-cola. Hence, any compensation received by your client pursuant to that agreement partakes only of the nature of a royalty, which is subject to Philippine income tax. Very truly yours, MELECIO R. DOMINGO Commissioner of Internal Revenue