§ 1.482-9(b)(8) Example 14.

Posted on | By Internal Revenue Service
Category: US IRC Section 482 on Transfer Pricing, § 1.482-9 Methods to determine taxable income in connection with a controlled services transaction | Tag: , , , ,
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Group of services.

(i) Company P, Company Q, and Company R assemble and sell gadgets to unrelated customers. Each of these companies purchases the components necessary for assembly of the gadgets from unrelated suppliers. As a service to its subsidiaries, Company P’s personnel obtain orders for components from all three companies, prepare purchase orders, and make payment to unrelated suppliers for the components. In addition, Company P’s personnel use data entry to input information regarding orders and sales of gadgets for all three companies into a centralized computer. Company P’s personnel also maintain the centralized computer system and extract data for all three companies on an as-needed basis. The services provided by Company P personnel, in conjunction with the centralized computer system, constitute a state-of-the-art inventory management system that allows Company P to order components necessary for assembly of the gadgets on a “just-in-time” basis.

(ii) Unrelated suppliers deliver the components directly to Company P, Company Q and Company R. Each company stores the components in its own facilities for use in filling specific customer orders. The companies do not maintain any inventory that is not identified in specific customer orders. Because of the efficiencies associated with services provided by personnel of Company P, all three companies are able to significantly reduce their inventory-related costs. Company P’s Chief Executive Officer makes a statement in one of its press conferences with industry analysts that its inventory management system is critical to the company’s success.

(iii) Assume that these services relating to tracking purchases and sales of inventory are specified covered services within the meaning of paragraph (b)(3)(i) of this section. Under the facts and circumstances, the taxpayer is unable to reasonably conclude that these services do not contribute significantly to the controlled group’s key competitive advantages, core capabilities, or fundamental risks of success or failure in the group’s business. Company P is not eligible to charge these services to Company Q and Company R in accordance with the services cost method.

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