Contents - AL-Tax

9.3 Analysis Under Existing Regime 129non-violators, printing and mailing citations and preparing court evidence packages(consisting of duplicate copies of the citations mailed to violators, several full-size,unmodified photographs and a checklist of these items).9.2 Transfer Pricing IssuesThere is only one transfer pricing issue in this case: USS’ purchases of components,equipment and infrastructure assets from FP.9.3 Analysis Under Existing RegimeIn this segment, we establish arm’s length prices for FP’s components, equipmentand assets on sales to USS under the current transfer pricing regime. In applyingthe Best Method Rule, we first considered the CUP method, a logical possibilityin that FP sells ETC system components, equipment and assets to third parties aswell. However, we conclude that these transactions are not suitable CUPs for thefollowing reasons: FP sells to USS in much higher volumes than it sells to third parties; FP’s third party customers are located primarily in the Middle East and Asia,whereas USS is domiciled in the United States. The U.S. market differs fromthese other markets in a number of respects (degree of decentralization, the rateat which ETC technology has been adopted, etc.); The system elements that FP sells to USS are generally customized to a significantlygreater extent than the standardized system elements that it sells in othermarkets; and, In most cases, FP sells directly to governmental entities, whereas USS is interposedbetween FP and tolling authorities.In short, application of the CUP method would require adjustments for differencesin equipment attributes, market conditions, market level and volume. Whilethe effects of different physical attributes and volumes on price can be quantifiedwith reasonable accuracy, the same cannot be said of differences in market leveland market conditions. Therefore, we do not use the CUP method to establish FP’sarm’s length prices on sales of ETC system elements to USS.In determining whether the resale price method can be utilized in this case,we distinguish between USS’ role as a services provider, on the one hand, andan importer/reseller of equipment, on the other. As previously noted, many tollauthorities purchase systems from USS outright on a one-time basis and rely onUSS to perform ongoing program implementation and maintenance services. USSdoes not transform the systems materially, or otherwise add significant value to thecomponents or components and equipment, prior to resale. Therefore, in relation tothe sale of equipment per se, USS functions as a distributor. The services fee incomethat USS earns on an ongoing basis vis-a-vis these types of transactions is not a