Multinational Business Machines (MBM) is the worlds largest producer of personal computers. It has an Australian subsidiary, MBM Australia Ltd.

MBM Australia Ltd manufactures personal computers in Australia under licence and sells its computers in Australia. It does not pay a royalty to this parent company, but it must buy the central processing units (CPU) from MBM.

MBM has similar agreements with all its subsidiaries around the world. The CPUs are manufactured by another subsidiary in Taiwan. MBM sells the CPUs to MBM Australia Ltd for $400 each. It sells its CPUs to subsidiaries in other countries at different prices, sometimes for more than $400, sometimes for less than $400. No sales are made to independent third parties. It is not known what price MBM pays the Taiwanese subsidiary, but speculation is that it is about $100.

MBM Australia Ltd makes a very small profit on its sales of personal computers. The Commissioner of taxation suspects that the price of $400 paid for the CPUs is too high and would like to recalculate MBM Australia Ltds taxable income.

Required: Advise the Commissioner on his power to do this, how he should exercise that power and the consequences flowing from its exercise