Contents - AL-Tax

7.4 Analysis Under Existing Regime 111with the Securities and Exchange Commission. However, in most instances, thefiling companies requested confidential treatment of the agreements, and all pricinginformation was redacted. As such, we were unable to use the comparable uncontrolledservices price method to establish USS’ arm’s length R&D and engineeringservices fees. The same issue arose with respect to USS’ customer relationship managementservices.The cost of services plus method does not apply to USS’ performance of R&Dand engineering services or to its customer relationship management services. USSdoes not render either of these services to third parties. USS’ customer relationshipmanagement activities could reasonably be characterized as liaison services renderedon behalf of FP, and, in principle, the gross services margin method maytherefore apply. However, as illustrated by certain of the examples given in theU.S. Temporary Regulations, this method is intended to address situations in whichthe tested party functions as a commission agent. Standalone commission agentstypically perform liaison functions in relation to comparatively small prospectivecustomers rather than current customers with very large-scale operations and correspondinglyhigh-volume purchases. Accordingly, commission agents are not sufficientlycomparable to USS, and the gross services margin method would not producereliable results in this instance.As described in Chapter 3, the residual profit split method is ordinarily reservedfor controlled transactions that involve “a combination of non-routine contributionsby multiple controlled taxpayers.” USS does not make non-routine contributions ofsignificant value in rendering services to FP. While it manufactures prototypes aspart of its R&D services, all of the proprietary intellectual property utilized in thedevelopment and manufacture of disks is owned by FP. While the Group has longstandingrelationships with disk drive suppliers, these relationships do not enableit to earn above-normal returns, as discussed at length above. Stated differently,established customer relationships are “routine intangibles,” and do not generateresidual income.Given that the safe harbor services cost method, the comparable uncontrolledservices price method, the gross services margin method, the cost of services plusmethod and the residual profit split method do not apply, we utilize the comparableprofits method to establish USS’ arm’s length fees for the R&D, engineering andcustomer relationship management services that it renders to FP. Because severalof the companies included in each of our samples reported only segment revenuesand segment operating profits, as discussed below, we utilize reported markups overtotal cost as our profit level indicator. (The alternatives would have entailed workingwith significantly smaller samples.)7.4.2 Application of Selected Method: CRM ServicesAs noted, we establish arm’s length fees for USS’ customer relationship managementservices by application of the comparable profits method. We identifiedindependent companies in the business of rendering CRM and other business