C-168/78

2. The first paragraph of Article 95 must in the comparison of tax burdens, be interpreted widely so as to cover whether in terms of the rate, the all taxation procedures which conflict mode of assessment or other detailed with the principle of the equality of rules for the application thereof, in treatment of domestic products and view of the difficulty of making imported products; it is therefore sufficiently precise comparisons be- necessary to interpret the concept of tween the products in question, the "similar products" with sufficient second paragraph of that article is flexibility. It is necessary to consider based upon a more general criterion, as similar products which have similar in other words the protective nature characteristics and meet the same of the system of internal taxation. needs from the point of view of consumers. It is therefore necessary to 4. Whilst Community law, as it stands at determine the scope of the first present, does not prohibit certain tax paragraph of Article 95 on the basis exemptions or tax concessions, in not of the criterion of the strictly particular so as to enable productions identical nature of the products but or undertakings to continue which on that of their similar and would no longer be profitable without comparable use. these special tax benefits because of the rise in production costs, the 3. The function of the second paragraph lawfulness of such practices is subject of Article 95 is to cover all forms of to the condition that the Member indirect tax protection in the case of States using those powers extend the products which, without being similar benefit thereof in a non-discrimi- within the meaning of the first natory and non-protective manner to paragraph, are nevertheless in imported products in the same competition, even partial, indirect or situation. potential, with certain products of the importing country. For the purposes 5. The classifications in the Common of the application of that provision it Customs Tariff which were designed is sufficient for the imported product with the Community's foreign trade to be in competition with the in mind, do not provide conclusive protected domestic production by evidence as to whether different reason of one or several economic products in relation one to another uses to which it may be put, even are similar within the meaning of the though the condition of similarity for first paragraph of Article 95 of the the purposes of the first paragraph of EEC Treaty, or in competition, even Article 95 is not fulfilled. partial, indirect or potential, and so Whilst the criterion indicated in the covered by the second paragraph of first paragraph of Article 95 consists that article.

APPLICATION for a declaration that, by applying a discriminatory tax system on spirits, the French Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty,

THE COURT

composed of: H. Kutscher, President, A. O'Keeffe and A. Touffait (Presidents of Chambers), J. Mertens de Wilmars, P. Pescatore, Lord Mackenzie Stuart, G. Bosco, T. Koopmans and O. Due, Judges,

Advocate General: G. Reischl Registrar: A. Van Houtte

gives the following

JUDGMENT

(in Ff)

Spirits obtained Spirits obtained Year Geneva from wine from grain

Purchase tax (per hi 1975 3 060 3 060 3 060 of pure alcohol) 1976 3 490 3 490 3 490 1977 3 880 3 880 3 880 1978 3 880 3 880 3 880 1979 4 270- 4 270 4 270

Manufacturing tax (per hi 1975 1 530 515 — of pure alcohol) 1976 1 745 585 — 1977 1 920 645 — 1978 1 920 645 — 1979 2 110 710 ' —

Total duty 1975 4 590 3 575 3 060 1976 5 235 4 075 3 490 1977 5 800 4 525 3 880 1978 5 800 4 525 3 880 1979 6 380 4 980 4 270

COMMISSION v FRANCE

In its reply of 25 February 1975, the The written procedure followed the French Government contested that the normal course; the Government of the products in question could be considered French Republic did not lodge a similar or interchangeable; it claimed rejoinder. that the differences in taxation complained of could not therefore come The Court, after hearing the report of within either the first paragraph or the the Judge-Rapporteur and the views of second paragraph of Article 95. the Advocate General, decided to open the oral procedure without any Taking the view that the French preparatory inquiry. It requested the Republic was, by applying taxation the Commission and the French Republic effect of which was to afford protection however to reply in writing to certain to national production, failing to fulfil its questions; that request was complied obligations under Article 95 of the EEC with within the prescribed periods after Treaty, the Commission, by letter of those periods had been extended. 16 March 1976, initiated against the French Republic the procedure laid down in Article 169. I l l — C o n c l u s i o n s of t h e p a r t i e s The French Government, in its obser- vations of 31 May 1976, maintained its The Commission claims that the Court viewpoint that it was impossible to should: complain that the French Republic had been in breach of the Treaty. — Declare that, by applying a discrimi- Consequently, on 22 December 1976 the natory tax system on spirits, the Commission delivered to the French French Republic has failed to fulfil its Republic the reasoned opinion provided obligations under Article 95 of the for in the first paragraph of Article 169 EEC Treaty; of the Treaty. The French Republic was requested therein to adopt within 45 — Order the French Republic to pay the days the necessary measures to put an costs.

The Commission takes the view that the French tax system has the effect of (b) It follows from the case-law of the imposing on spirits a burden in inverse Court that for the purpose of defining proportion to the volume of domestic the concept of "similar products" it is production so as to afford protection to appropriate to compare the taxation on French-produced spirits in relation to products which, at the same stage of those from Member States. production or marketing, have similar characteristics and meet the same needs from the point of view of consumers; the fact that a domestic product and an The interpretation of Article 95 of the imported product are or are not EEC Treaty classified under the same heading of the Common Customs Tariff constitutes in (a) The function of Article 95 is to this respect an important criterion. eliminate, after the abolition of customs duties and charges having equivalent The Court has shown its preference for effect, the last trade barriers, not only criteria which are more certain and those against identical imported products easier to apply and are based on formal in relation to domestic products but also factors as against other criteria of a those against products which are similar material nature which are based in to or in competition with those domestic particular on the nature and quality of products. Article 95 should operate on the products, the raw materials used and the basis of objective criteria which are the manufacturing processes. extraneous to all considerations of economic or social policy. The prohibition on tax discrimination does Similarity must be appraised from the not allow of any exception. Article 95 is point of view of consumers and their an additional rule of the customs union needs; the concept of similarity and leaves no scope for conditional contained in Article 95 is specifically application or application subordinate to subject to tax requirements, disregarding criteria for interpretation formulated the physical or chemical properties of the outside the Community rules. Its aim is products in question. to guarantee the transparency of the common market and to protect the The concept of similarity cannot be principle of the neutrality of taxation at national in dimension: a single, uniform

definition for all the Member States is (b) The classification of the products necessary rather than nine divergent and under the same tariff heading in the contradictory definitions. Common Customs Tariff constitutes an important criterion; the Common customs Tariff classifies all spirituous beverages under the same tariff heading, (c) The second paragraph of'Article 95 22.09 C. extends the prohibition on tax discrimi- nation to competing imported products which may be substituted for domestic In view of the fact that the rates of duty products. This provision confirms that are fixed on the basis of subdistinctions, barriers to trade expressed by tax it is necessary to take into consideration measures which are of such a nature as the fact that the tax relationship between to afford direct or indirect protection to tariff subheadings and sub-items is based domestic production from competition on special considerations dependent by imported products are incompatible upon the commercial policy of the with the Treaty. It follows from the Community or on its tariff policy and case-law of the Court that Article 95 is that the existence of such subdistinctions intended to eliminate all discrimination does not prevent the spirituous beverages between imported and domestic products thus classified being found to be similar. which are in whatever manner in legitimate confrontation within the common market. The classification into tariff headings and subheadings is, of course, merely indicative as regards the appraisal of similarity; nevertheless, the classification (d) It is not' appropriate to use the of "spirituous beverages" in subheading device of harmonization for the purpose C of tariff heading 22.09 is an indication of eliminating trade barriers of a tax of their similarity which the other factors nature: it is incorrect to make the on the file only confirm. prohibition on tax discrimination which flows from Article 95, a provision which has direct effect, subject to the adoption of "implementing" rules forming the (c) Spirits, whether obtained from subject-matter of harmonization direc- cereals or wine and fruit, have, tives within Article 99 of the Treaty. according to the Explanatory Notes to the Brussels Nomenclature, from the point of view of consumption, similar characteristics and meet the same needs The relationship between the various of consumers. Those needs may spirits obviously be determined and influenced by various factors: habits, individual preferences, local or national traditions, social, seasonal and climatic conditions, (a) The similarity between the spirits, or even fashion; nevertheless, on the in the absence of Community rules and market spirits appear, as far as definition, cannot be appraised according consumers are concerned, to be products to the rules of the country concerned. which are no longer complementary but The concept of "similar domestic parallel, in other words similar products products" requires a uniform interpre- within the meaning of the first paragraph tation for all the Member States. of Article 95.

(f) The various spirits, whatever the raw materials from which they are The infringement of the second paragraph produced, may be used in very different of Article 95 ways. It follows from this variety of uses that several spirits always correspond to (a) Even accepting that the similar each of them; there is no case in which nature of the products in question may only one of them, manufactured from a be contested, the French rules in any specific wine, fruit or cereal, cannot be case constitute an infringement of the replaced by one or several others which second paragraph of Article 95: the are not necessarily in one or other of the taxation on spirits obtained from cereals categories laid down by the French and geneva constitutes taxation of such a legislation. Spirits, however, all meet nature as to afford indirect protection to comparable needs in their diversity. spirits obtained from wine.

(b) The incidence of the tax on whisky (g) An examination on the basis of the and cognac must be calculated on the first paragraph of Article 95 must be retail selling prices excluding tax and not made taking into account not the raw including tax for reasons both of tax materials used but the similarity of the practice and of transparency. In terms of products obtained at the end of the competition the prices including tax are manufacturing process. already distorted by the existence of the discriminatory tax.

(h) Spirits, in their diversity, have the The selling prices indicated by the same uses; assuming that they are not French Government do not correspond

to the average retail prices charged in ation of the case-law of the Court of France for the products concerned. Justice; it follows from that case-law, on the one hand, that although formal The extent of the discrimination must factors constitute, at the most, an not be assessed by taking into "important criterion" for the purpose of consideration the difference between the assessing the relationship of similarity, incidence of the tax on whisky and that they are not themselves determining for on cognac but having regard to the the purpose of proving such similarity, relationship between those two and, on the other, it is necessary incidences. ultimately to examine whether, from the point of view of consumers, the products (c) The figures relating to the in question have similar properties and consumption of whisky and cognac in meet the same needs. France are not such as to justify the difference in taxation on those spirits but rather to explain the reasons prompting (d) As these are formal criteria and, the French Government to have no more particularly, customs tariff intention to bring it to an end. headings laid down by the Common Customs Tariff, it is necessary to bear in The Government of the French Republic mind that although tariff heading 22.09 considers that the tax system on spirits in C gathers together all "spirituous France is not contrary either to the first beverages", on the other hand, the rates or to the second paragraph of Article 95 of the EEC Treaty. of duty, are fixed on the basis of the subheadings; over and above the method of classification, the customs reality is The alleged infringement of the first therefore that fixed by the tariff paragraph of Article 95 subheadings. The Court moreover, (a) The existence of a tax system establishes the classification of products distinguishing between several categories as to which there is uncertainty on the of products cannot, quite clearly, have basis of that customs reality. The by itself the effect of bringing that existence of those distinctions between system within the first paragraph of categories of beverage within the same Article 95: the implementation of that tariff heading shows that even according provision implies the application of to formal criteria the products in criteria by which the existence or lack of question cannot be considered as similar similarity may be recognized. products.

(e) Moreover, the various categories of The alleged infringement of the second spirits do not have similar properties and paragraph of Article 95 do not meet the same needs from the point of view of consumers. (a) It follows from the case-law of the Court that the second paragraph of Article 95 prohibits the protective effects — The various products are of internal taxation either as regards a distinguished by important differences in competing product or an activity linked their chemical composition. Distillation to the manufacture of the product. In enables "non-alcoholic" constituents to this case only the alleged protection of be extracted, of which there may be domestic products against competing more than 275; the "flavour" of the imported products is at issue. distillate emerges from the combination of those constituents, in other words, (b) The French system of taxation on organoleptic qualities which combine spirits does not come within the second taste, flavour and smell. This difference paragraph of Article 95, principally in chemical composition can only create because there is no competition between special organoleptic properties which are the categories of products which it noticed by consumers. The Court itself establishes and, in the alternative, considered that those characteristics because the relative level of taxation validly enabled the products to be between those categories of products is distinguished from one another. not of such a nature as to afford protection to one of them. — From the point of view of the needs of consumers, spirits are neither (c) The categories of spirits are not competing nor substitute products on the competing products: the different uses market, taking into account consumer for which the products are intended and habits. The organoleptic qualities of the the result of the fact that they are not various categories of spirits are obviously interchangeable from the point of view noticed by consumers; the methods of of consumers is that on the market consumption of those products are also consumption cannot be transferred from different (the distinction between one category of spirits to another. digestives and aperitifs, neat consump- tion or consumption with the addition of A shift in consumption determined by water or soda). As far as consumers are the relative level of prices can only occur concerned, the various products are within the same homogeneous category obviously not consumed indiscriminately; corresponding to identical consumer they correspond to quite specific and habits but certainly not from one distinct uses. category to another.

taxation in spirits obtained from wine is that the proposal for a directive on the 6% less than that imposed on whisky. harmonization of excise duty on spirits This difference in taxation is relatively and the proposal for a regulation on the small in the absolute; it is minimal, if not organization of the market in agri- non-existent, if the actual relationship cultural alcohol were adopted in due between those products is taken into time and, on the other, the fact that the consideration. The taxation on spirits in prohibition on tax discrimination laid the French system does not therefore down in Article 95 of the Treaty has not have the protective effect complained of been complied with. The latter provision and is shown, in fact, to be practically can from now on be fully effective; there neutral. is no justification for making the abolition of tax barriers subject to the adoption by the Council of the directive or regulation in question. Moreover, this system in no way dis- criminates against products from other countries of the Community. The proposal for a directive on the harmonization of excise duty on spirits (Journal Officiel 1972, C 43, p. 25) is (e) The alleged protective effect of the based on the principle of the similarity French system of taxation on spirits is between all spirits and on the need to also refuted by examining the trend in make the products subject to a tax the volume of consumption of imported system with a single rate per hectolitre of products; thus from 1963 to 1977 the pure alcohol. The proposal for a regu- consumption of cognac increased by less lation on the common organization of than 3 5 % and that of whisky ten times the market in ethyl alcohol of agri- more. cultural origin and additional provisions (Journal Officiel 1972, C 43, p. 3 and Official Journal 1976, C 309, p. 2) provides for measures concerning the (f) The tax system on spirits in France production of alcohol and intervention therefore has no effect contrary to the systems (price compensation, withdrawal second paragraph of Article 95. from the market and sale to reserved sectors), measures relating to alcoholic beverages (grant of aid and the imposition of equalization charges), measures of commercial policy and general provisions. Spirits obtained by V — R e p l i e s to q u e s t i o n s p u t by distilling wine are only referred to the C o u r t partially by that proposal, the intervention measures which are appro- priate and necessary for the purpose of maintaining the price of those products In its written replies to the questions put being expressly governed by the by the Court, the Commission empha- Community rules on wine (Council sized in particular, as regards the work Regulation No 337/79 of 5 February in progress at the Community level with 1979 on the common organization of the regard to the production of spirits and market in wine, Official Journal 1979 the harmonization of tax systems, that No L 54, p. 1). The Community already there is no relationship of cause and has appropriate economic means for effect between, on the one hand, the fact settling the most important problem, that

Taxation which is levied on domestic products and similar and/or competing VI — Oral procedure imported products within the meaning of Article 95 not only at the same rate but The Commission, represented by Jean- according to the same structure, on the Claude Séché, assisted by Mr Maurei, an one hand, and internal taxation which, expert and Principal Administrator in the whilst constituting different treatment Wine, Spirits and Derived Products from a tax point of view as regards the Directorate of the Directorate General rates and the structure of the tax, so as for Agriculture, and the Government of to benefit specific types of domestic the French Republic, represented by Noël products, is imposed on imported Museux, assisted by Mr Corrèze, an products without discrimination, in other expert and Assistant Director at the words which extends to imported Central Office of the Ministry for the products the more favourable treatment Budget, Directorate General for Taxes, for tax purposes reserved to certain delivered oral argument and replied to similar and/or competing domestic the questions put by the Court at the products within the meaning of Article hearing on 9 October 1979. 95, on the other, is compatible with Article 95. The essential factor is that the The Advocate General delivered his principle of the neutrality of taxation in opinion at the sitting on 28 November intra-Community trade should be 1979.

Decision

1 By application of 7 August 1978 the Commission brought under Article 169 of the EEC Treaty an action for a declaration that, by applying discrim- inatory taxation on certain spirits, the French Republic has failed to fulfil its obligations under Article 95.

s The first paragraph of Article 95, which is based on a comparison of the tax burdens imposed on domestic products and on imported products which may be classified as "similar", is the basic rule in this respect. This provision, as the Court has had occasion to emphasize in its judgment of 10 October 1978 in Case 148/77, H. Hansen jun. & O. C. Balle GmbH & Co. v Hauptzollamt Flensburg [1978] ECR 1787, must be interpreted widely so as to cover all taxation procedures which conflict with the principle of the equality of treatment of domestic products and imported products; it is therefore necessary to interpret the concept of "similar products" with sufficient flexibility. The Court specified in the judgment of 17 February 1976 in the REWEcase (Case 45/75 [1976] ECR 181) that it is necessary to consider as similar products which "have similar characteristics and meet the same needs

JUDGMENT OF 27. 2. 1980 — CASE 168/78

from the point of view of consumers". It is therefore necessary to determine the scope of the first paragraph of Article 95 on the basis not of the criterion of the strictly indentical nature of the products but on that of their similar and comparable use.

6 The function of the second paragraph of Article 95 is to cover, in addition, all forms of indirect tax protection in the case of products which, without being similar within the meaning of the first paragraph, are nevertheless in competition, even partial, indirect or potential, with certain products of the importing country. The Court has already emphasized certain aspects of that provision in its judgment of 4 April 1978 in Case 27/77, Firma Fink-Frucht GmbH v Hauptzollamt Müncben-Landsbergerstrasse [1978] ECR 223, in which it stated that for the purposes of the application of the first paragraph of Article 95 it is sufficient for the imported product to be in competition with the protected domestic production by reason of one or several economic uses to which it may be put, even though the condition of similarity for the purposes of the first paragraph of Article 95 is not fulfilled.

s The application in this instance of the criterion of similarity, which determines the scope of the prohibition laid down in the first paragraph of Article 95, has given rise to differences of opinion between the parties. According to the Commission, all spirits, whatever the raw materials used for their manufacture, have similar properties and in essence meet the same needs of consumers. Therefore, whatever the specific characteristics of the various products coming within that category and whatever the consumer habits in the various regions of the Community, spirits as finished products represent, from the point of view of consumers, a single general market. It is necessary to observe that this concept is expressed in the proposals submitted by the Commission to the Council for the establishment of a common organization of the market in alcohol, based on the application of a single rate of tax for all the products in question on the basis of their pure alcohol content.

COMMISSION v FRANCE

9 This concept is contested by the governments of the three defendant Member States. In their opinion, it is possible to distinguish in the case of spirits various categories of product which differ either in terms of the raw materials used or of their typical characteristics or of the consumer habits observed in the various Member States.

10 In this connexion, the Commission points out however that the appraisal of the characteristics of the various alcoholic beverages, in the same way as consumer habits, is variable in time and space and that such factors cannot provide valid criteria as regards the Community taken as a whole. It draws attention moreover to the danger of hardening such habits by means of tax classifications made by the Member States.

JUDGMENT OF 27. 2. 1980 — CASE 168/78

owe their individuality only to flavouring additives with a more or less pronounced taste. On the other hand, it is necessary to draw attention to the fact that in the case of spirits there are products which may be consumed in very different forms, either neat or diluted or, again, in the form of mixtures. These products may therefore be in competition with a range of varying size of other alcoholic products of more limited use. A characteristic of the three cases brought before this Court is however the fact that in each there are, in addition to well-defined spirits, one or several products with a broad range of uses.

u In the various procedures, the parties have relied, with regard to the distinction between several categories of alcoholic product, upon certain statements made by the Court of Justice in the judgment in the Hansen & Balk case, supra, which was delivered at a time when these applications were pending. Reference has been made more particularly to a passage in that judgment which states as follows: "At the present stage of its development and in the absence of any unification or harmonization of the relevant

COMMISSION v FRANCE

provisions, Community law does not prohibit Member States from granting tax advantages, in the form of exemption from or reduction of duties, to certain types of spirits or to certain classes of producers. Indeed, tax advantages of this kind may serve legitimate economic or social purposes, such as the use of certain raw materials by the distilling industry, the continued production of particular spirits of high quality, or the continuance of certain classes of undertakings such as agricultural distilleries".

JUDGMENT OF 27. 2. 1980 — CASE 168/78

The subject-matter and the background of the dispute in question i7 The terms in which the Commission brought its action against the French Republic call for certain preliminary observations concerning the subject- matter of the dispute. Whereas, according to the conclusions contained in the application, the Commission asks the Court for a declaration that the French Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty "by applying a discriminatory tax system on spirits", it appears from the wording itself of the application and from subsequent developments in the case that the application in fact concerns only certain elements of the French legislation thereon, in other words the discriminatory taxation imposed on geneva and other alcoholic beverages resulting from the distillation of cereals on the one hand and on spirits obtained from wine and fruit on the other. More specifically, the Commission refers above all to the difference in the taxation on two typical and well-known products, whisky and cognac.

is The French Government contested this way of putting the problem when, they claim, the categories of taxation adopted by the Commission do not correspond either to the terminology of the French legislation or to French tax practice.

i9 This preliminary objection raised by the French Government is justified. It is necessary therefore to recall the wording of the provisions at issue in the Commission's application, in other words Articles 403 and 406 of the Code General des Impôts [General Taxation Code], so as to ascertain the subject- matter of the dispute in terms adapted to the state of French legislation. This legislation is subject to annual amendments through successive finance legislation, so that it is quoted hereinafter in the state in which it was at the date of the hearing by the Court.

24 Although it may have seemed more appropriate to examine the system of taxation on alcoholic beverages in France as a whole, in particular so as to be able to appraise from a general point of view the question of the similarity of the various products, it is however impossible to contest the objectivity of the Commission's presentation of the facts of the case as regards the treatment for tax purposes applied to the three categories of products which it chose to adopt, in other words spirits obtained from cereals, geneva and spirits obtained from wine and fruit.

25 It follows from this that all the alcoholic beverages referred to by the Commission are uniformly subject to the same purchase tax but that genevas and other alcoholic beverages resulting from the distillation of cereals are subject in addition to a manufacturing tax which is n o t applicable t o spirits derived from wine a n d fruit. It is also not contested t h a t there is n o significant p r o d u c t i o n of geneva and o t h e r spirits obtained from cereals in France. T h e Commission considers, in these circumstances, that the tax system is c o n t r a r y t o the provisions of Article 95 in that it gives a tax advantage to certain spirits p r o d u c e d in France whereas similar o r c o m p e t i n g products imported from other Member States are subject to an additional tax.

26 The French Government puts forward two lines of argument for the purpose of defending the tax system complained of:

JUDGMENT OF 27. 2. 1980 — CASE 168/78

— First, it contests that the products referred to in the application are similar within the meaning of the first paragraph of Article 95;

28 In accordance with the viewpoint recalled above, the Commission considers that all the spirits in question are "similar" products within the meaning of the first paragraph of Article 95. The detailed rules on taxation applied under the French tax legislation are therefore incompatible with the prohibition against discrimination laid down in the first paragraph of Article 95. The Commission considers that the customs classification of the products in question, which are all grouped under "spirituous beverages" in tariff sub- heading 22.09 C of the Common Customs Tariff and covered in a common definition by the relevant Explanatory Note to the Brussels Nomenclature, supports its argument. That note in fact describes as "spirits" products obtained "by distilling wine, cider or other fermented beverages or fermented grain or other vegetable products". The Commission recalls moreover the terms in which the Court of Justice defined the concept of similarity in its judgment in the above-mentioned REWE case.

29 From the point of view of the second p a r a g r a p h of Article 9 5 , the Commission observes that the French tax system is adjusted so as t o place at a disadvantage spirits obtained from cereals which are almost exclusively imported from o t h e r M e m b e r States, w h e r e a s domestic p r o d u c t i o n of those products is insignificant. O n the o t h e r h a n d , the main domestic p r o d u c t , in other w o r d s spirits obtained from w i n e a n d fruit, are favoured in that they are n o t subject to the p a y m e n t of the " m a n u f a c t u r i n g t a x " . It thus seems t h a t this tax system, even if it w e r e necessary t o state that spirits obtained from wine and fruit o n the o n e h a n d a n d spirits obtained from cereals o n the o t h e r are n o t similar, is of such a n a t u r e as t o afford an indirect competitive advantage to national p r o d u c t i o n .

32 As regards the criteria which may be used for the classification of the products, the French Government considers that it is the "flavour" of the distillate, in other words, a number of organoleptic properties combining taste, aroma and smell, which, from the point of view of satisfying the needs of the consumer, forms the basis of the classification of products which are neither similar nor even interchangeable or competing within Article 95. The relevance of that criterion has been expressly acknowledged, it claims, in the judgment of 29 May 1974 in Case 185/73, Hauptzollamt Bielefelds Offene Handelsgeselhchafi in Firma H. C. König [1974] ECR 607, in which in order to distinguish between tariff subheading 22.09 A (ethyl alcohol) and tariff subheading 22.09 C V (other spirituous beverages), the Court referred to the presence in spirituous beverages "of flavouring substances or distinctive properties of taste".

34 As regards the application of the second paragraph of Article 95, the French Government claims that there is no competition between the products coming within both tax categories laid down by the French legislation so that there cannot be a shift in consumption from one category of spirits to another as the result of a difference in taxation. True competition exists between whisky and aniseed spirits which in fact come within the same tax category. The system contested by the Commission has, moreover, had no protective effect as shown, according to the French Government, by the comparative statistics on the consumption of cognac and whisky in France from which it is clear that although the consumption of cognac increased only moderately in the period from 1963 to 1977 (from 33 361 hectolitres to 44 745 hectolitres), the consumption of whisky increased spectacularly during the same period (from 34 104 hectolitres to 117 379 hectolitres).

COMMISSION v FRANCE

before, during or after meals or even completely unrelated to such meals; it seems, moreover, that, according to consumer preferences the same beverage may be used indiscriminately as an "aperitif" or "digestive". Therefore it is impossible to recognize, for the purposes of the application of Article 95 of the Treaty, the objective value of the distinction upon which French tax practice is based.

37 The same observation applies to the criterion for distinction based on the flavour of the various spirits for the purpose of determining the properties of the products in question with regard to the application of tax legislation. There is no question of denying the reality of and the shades of difference in the flavour of the various alcoholic products; it is necessary however to bear in mind that this criterion is too variable in time and space to supply by itself a sufficiently sound basis for distinction for the definiton of categories which may be recognized throughout the Community. The same applies to consumer habits which also differ from region to region and even according to social environment, so that they cannot supply appropriate differentiating criteria for the purpose of Article 95.

38 Classifications based on the flavour of the products and c o n s u m e r habits are all the m o r e difficult to lay d o w n since the products in question, such as whisky and genevas, m a y be c o n s u m e d in very varied circumstances, either neat or diluted or in the form of mixtures. O w i n g in particular t o this flexibility of use, those drinks m a y be considered as similar to a particularly large n u m b e r of o t h e r alcoholic beverages o r as in at least partial competition which those beverages.

4i As the competitive and substitution relationships between the beverages in question are such, the protective nature of the tax system criticized by the Commission is clear. A characteristic of that system is in fact that an essential part of domestic production, in other words spirits obtained from wine and fruit, come within the most favourable tax category whereas at least two types of product, almost all of which are imported from other Member States, are subject to higher taxation under the "manufacturing tax". The fact that another domestic product, aniseed spirits, is similary placed at a disadvantage does not rule out the protective nature of the system as regards the treatment for tax purposes of spirits obtained from wine and fruit or the existence of at least partial competition between those spirits and the imported products in question. As for the fact that the market share of whisky has increased in spite of the tax disadvantage which it suffers, this fact does not prove that there is no protective effect.

42 It is necessary to state in conclusion from the foregoing that the tax system applied in the French Republic under the provisions of the Code General des Impôts is incompatible with the requirements laid down in Article 95 of the Treaty as regards taxation on the one hand on genevas and other alcoholic beverages obtained from the distillation of cereals and, on the other, on spirits obtained from wine and fruit.

Costs

43 Under Article 69 (2) of the Rules of Procedure, the unsuccessful party shall be ordered to pay the costs.

2. Orders the French Republic to pay the costs.

Kutscher O'Keeffe Touffait Mertens de "Wilmars Pescatore

Mackenzie Stuart Bosco Koopmans Due

Delivered in open court in Luxembourg on 27 February 1980.

A. Van Houtte H. Kutscher Registrar President

O P I N I O N OF MR ADVOCATE GENERAL REISCHL DELIVERED O N 28 NOVEMBER 1979 l