Contents - AL-Tax

110 7 Performance of Intercompany Servicesforced by their OEM customers to deliver constantly improving disk drives, and(d) depend on their disk suppliers to enhance their own products’ functionality,generates extreme pressure on independent magnetic disk suppliers to innovatecontinuously and steadily reduce disk prices. Established customer relationships do not enable independent magnetic disk suppliersto realize marketing cost savings. Although disk suppliers have no need(or real opportunity) to solicit new customers, their existing customers demandan extremely high level of interaction and service. Hence, while disk suppliers’customer-related expenditures are more in the nature of customer service thanselling per se, they are not lower by virtue of their established customer base. Independent magnetic disk suppliers do not benefit from their respective establishedcustomer bases by means of a reduction in the volatility of their earnings.Individual customers’ volume “commitments” do not constitute a guaranteedstream of income. Despite the fact that such commitments are part of long-term,written contracts, they are not legally binding, as noted, and disk suppliers do notpenalize customers for the cancellation of orders or reductions in order volumes.Based on this analysis of market structure and dynamics, we conclude that USSshould not earn a return, over and above its services fees, in consideration for itsdevelopment of customer relationship intangible assets.7.4 Analysis Under Existing RegimeConsider next USS’ arm’s length consideration for services rendered to FP, as determinedunder the existing transfer pricing regime.7.4.1 Application of Best Method RuleThe R&D and engineering services that USS renders to FP are integral to the latter’sbusiness and “contribute significantly to its key competitive advantages, core capabilities[and] fundamental chances of success or failure.” As such, USS’ R&D andengineering services fees should include a profit element, in addition to the recoveryof its associated costs.The customer-related services that USS renders to FP consist predominantly ofliaison functions and sales forecasting. These activities are routine, and companiesin a broad range of industries perform them. However, given the importance of customerrelationships in this industry, we conclude that a markup is warranted on theseservices as well. (Moreover, a reasonable argument could be made that the servicesat issue are included on the U.S. Temporary Regulations’ “black list” of services.)To the end of applying the comparable uncontrolled services price method toestablish USS’ arm’s length fees for R&D and engineering services, we identifieda number of engineering services agreements between unrelated parties. Some ofthese agreements were attached to one (or both) of the parties’ Form 10-K filings