On July 26, 2010, the Federal Court of Appeal (FCA) set aside the Tax Court's May 2008 decision regarding the pricing of the active ingredient, ranitidine, in GlaxoSmithKline's blockbuster ulcer drug, Zantac. In that decision, the Tax Court Judge accepted the Canada Revenue Agency's (CRA) argument that the intercompany price of the drug should be based on comparable uncontrolled prices (CUPs) of generic versions of the drug. (For more details see our PKN dated June 13, 2008). Whereas the Tax Court found that the price of the active ingredient could be established by prices in the generic market, ignoring the fact that the taxpayer's transaction took place in the branded pharmaceutical market; the FCA found that the business realities such as the use of the brand name, and the higher prices that result, should be taken into account, and bring into question the comparability of those generic CUPs. Although the FCA set aside the original decision, it would not make the ultimate determination of an appropriate arm's length price and returned the matter to the Tax Court Judge for reconsideration.
From 1990 to 1993, GlaxoSmithKline Inc. (GSK Canada) had acquired the active ingredient for Zantac from a related company, Adechsa, under the "Supply Agreement", at prices ranging from $1,512 to $1,652 per kilogram. Under a second agreement, the "License Agreement", GSK Canada obtained the rights from Glaxo Group to use the trademark, "Zantac", among other benefits, for a royalty of 6%. The Tax Court Judge rejected the taxpayer's arguments that the agreements should be considered together in establishing whether the price paid for the active ingredient was "reasonable in the circumstances", (the arm's length standard at the time as required by section 69 of Canada's Income Tax Act). Instead, the Tax Court Judge restricted his analysis to the Supply Agreement only, which he deemed comparable to supply agreements between generic producers and distributors. The FCA took the opposite view, recognizing that the Licence Agreement is relevant to determining the price that would have been reasonable in the circumstances. Specifically Glaxo Group's ownership of the Zantac trademark, the premium that Zantac commanded over generic ranitidine drugs in the market, the inability of the taxpayer to compete in the generic market without the Zantac trademark, and, the portfolio of other products to which the taxpayer had access under the Licence Agreement, were all relevant factors in the view of the FCA.