A schedule prepared by the controller's office of petitioner's glass division covering the first 9 months of 1959 shows a net income of $380,335 earned by petitioner on sales of glass products to PPGI in the amount of $5,036,138. The schedule was prepared by using a 7-month average of standard variable costs of products and multiplying this figure by the units sold. Period, research, selling, general, and administrative costs were then added to the variable cost figure. To determine these additional costs, the variable cost was multiplied by a percentage figure. The schedule shows that for a large group of glass products sold by petitioner to PPGI these additional costs averaged 58.9 percent of the variable costs.

The internal financial statement of PPGI covering a 13-month period ending December 31, 1960, shows net income from the sale of glass products, paint products and chemicals as follows:

'Reduced by the amount of $67,100 representing commissions paid to PPGI by its affiliate (petitioner). The internal financial statements of PPGI indicate net income from the sale of glass products, paint products, and chemicals for the month of December 1959 as follows:

For the 12-month period ending December 31, 1960, the net sales, gross profits, and net profits of PPGI, as shown by its internal financial statements, are as follows:

100.1

66.8

4.0

29.3

184.2

172.7

6.2

5.3

In 1960 PPGI received commissions in the amount of $63,700 from sales of Pittsburgh Corning products which were not included in income in the preceding schedules for 1960. However, the expenses incurred in earning such commissions were included in the preceding schedules for 1960.

The internal financial statement of PPGI for the year ending December 31, 1961, shows net income from the sale of glass products, paint products, and chemicals as follows:

1 Other income or (deduction) items shown on Exhibit CS are omitted.

The internal financial statements of PPGI show gross income from sales of petitioner's glass products to CPI, Duplate, and other customers during the years ended December 31, 1960 and 1961, as follows:

The internal financial statements of petitioner's paint and brush division show that it sustained a loss of $24,300 on net sales of paint products to PPGI during the year 1960 in the amount of $496,400. In the computation of such loss none of the research, development, and

advertising costs were allocated to the products sold to PPGI. Moreover, the loss of $24,300 in the year 1960 was computed before the allowance of the volume discount under the agreement between petitioner and PPGI.

The internal financial statements of petitioner's paint and brush division reflected the following net income on its net sales of paint products to PPGI: $42,000 (actual) on net sales of $579,000 in 1959 and $69,000 (forecast) on net sales of $670,000 (forecast) in 1961.

A summary of PPGI's balance sheet as of December 31, 1960 (covering a 13-month period ending on 12/30/1960), and December 31, 1961, as it appears in the audited financial statements is as follows:

PPGI BALANCE SHEET, DEC. 31, 1960

Assets

Current assets:

Cash

Funds available to wholly owned subsidiary..

Accounts receivable__

Notes receivable____.

Merchandise (at cost) shipped to customers but not billed____

$214, 291. 32 229,000.00

4, 216, 657. 05

419, 500.00 102, 575. 70

5, 182, 024. 07

56, 366. 04

3,079, 880. 72

amortization)

1,906, 530.00

Property-at cost, less accumulated depreciation (machinery and

equipment; furniture and fixtures)

346, 829. 28

Deferred charges other assets---.

193, 511. 44

Rights to technical data and know-how (at cost, less accumulated