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level; i.e., to determine the aggregate of U.S. affiliate
expenses allocable and apportionable to the gross income from the
integrated product containing the component product. Q&A-12 then
prescribes the PCR as the exclusive basis for allocating and
apportioning those expenses to the component possession product.
Petitioner argues that under the plain meaning of the regulation,
the PCR applies to all U.S. affiliate expenses allocable and
apportionable to the integrated product; i.e., syrup and soft
drinks.
Furthermore, argues petitioner, the example in Q&A-12
confirms this interpretation. In the example, expenses of the
U.S. affiliates are allocated and apportioned to the integrated
product, computers, and then apportioned to the component
product, central processing units, using the PCR. Thus,
petitioner argues, the example provided in Q&A-12 supports the
plain meaning of the regulation.
Respondent contends that on the facts before us, section
936(h)(5)(C)(ii)(II), as interpreted by Q&A-1, requires that all
expenses that USA incurs, and those CBO expenses that are
factually related to concentrate gross income, be apportioned in
full to such income. Respondent argues that Congress did not
intend the results that flow from petitioner's application of the
PCR to U.S. affiliates' expenses known to be factually related
to, and therefore allocable and apportionable solely to, the
gross income derived from CRI's component concentrate. With
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