The taxpayer purchased an active pharmaceutical ingredient from an affiliated non-resident corporation ("Adechsa") for approximately five times the amount that was paid by Canadian generic drug manufacturers for that (chemically identical) ingredient. The taxpayer then used the ingredient to produce pills or other delivery mechanisms, and marketed the product under the applicable brand name. The trial judge found that, for the purpose of deducting its ingredient costs, the taxpayer should be deemed under s. 69(2) to have paid the lower generic rate. However, the taxpayer had been licensed by another affiliated non-resident (the "Glaxo Group") to among other things use the drug's brand-name in its marketing, but was required under this licence agreement to buy the active ingredient from Adechsa or another affiliate at the elevated price.
After noting (at para. 47) that an arm's length distributor of the Glaxo Group might well be faced with the same requirement under a licence agreement to purchase from these Glaxo affiliates, Rothstein J. found (at para. 52) that the licence agreement was clearly relevant to determining whether some level of premium pricing under the Adechsa supply agreement still resulted in a price that would have been reasonable in the circumstances if the taxpayer and Adechsa had been dealing at arm's length:
Considering the Licence and Supply agreements together offers a realistic picture of the profits of Glaxo Canada. ... The prices paid by Glaxo Canada to Adechsa were a payment for a bundle of at least some rights and benefits under the Licence Agreement and product under the Supply Agreement.
He also noted (at para. 42) that this approach was consistent with the 1995 OECD Transfer Pricing Guidelines, para. 1.15, which indicated that:
[A] proper application of the arm's length principle requires that regard be had for the 'economically relevant characteristics" of the arm's length and non-arm's length circumstances to ensure they are "sufficiently comparable".
The Court also denied the taxpayer's cross-appeal, which had advanced the position that the Minister's assumptions had been "demolished," so that the Minister's reassessment should be set aside rather than referring the matter back to the Tax Court for determination of a reasonable price in light of the now-established relevance of the licensing agreement. Although a price above the generic rate may have been justified, it did not necessarily follow that a price five times the generic rate was reasonable.