C-171/78

APPLICATION for a declaration that, by not complying with the opinion by which the Commission requested it to introduce uniform taxes on spirits, the Kingdom of Denmark has been in breach of the first paragraph or, alter- natively, the second paragraph of 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 OF 27. 2. 1980 — CASE 171/78

The facts, procedure, conclusions and According to Articles 3 and 4 of the law, submissions and arguments of the parties aquavit (and schnapps) means products may be summarized as follows : which are manufactured from neutral spirits, contain vegetable flavouring matter, have a minimum alcohol content of 4 0 % and a maximum alcohol content I — Facts of 49.9% of the original volume, contain less than two grammes per 100 millilitres Danish production of spirits, in other of vegetable extract and do not have the words spirituous beverages obtained by characteristics of gin, vodka, geneva, distillation coming within tariff sub- wacholder and other liqueurs, punch, heading 22.09 C of the Common bitters and beverages treated as such, Customs Tariff, has been during recent aniseed spirit, rum, spirits obtained from years of the order of 7 million litres per fruit and others whose typical taste is annum. It consists essentially of aquavit produced through distillation or (or schnapps), the yearly production of maturation. which is almost 6 million litres, in other words approximately 8 5 % of the total On 22 December 1975 the Commission production of spirits for human asked the Danish authorities for more consumption in Denmark. detailed information on the national Aquavit (or schnapps) represented 6 7 % system of taxation on spirits which it in 1972 and 6 3 % in 1977 of the total considered to be incompatible with consumption of spirits in Denmark, Article 95 of the EEC Treaty. That which is of the order of 9 million litres information was supplied to it on 17 per annum. February 1976. It confirmed that the excise duty on spirits of Dkr 154.80 per Imports into Denmark of spirits from the litre of pure ethyl alcohol was reduced to other Member States amounted to Dkr 108.60 in the case of aquavit (and 2 300 000 litres in 1975; they were made schnapps). up essentially, in order, of whisky, vodka, cognac, gin and rum. In a letter sent to the Danish The Danish legislation (the provisions at Government on 26 March 1976, the present applicable are contained in Co- Commission found in particular that ordinated Law No 151 of 4 April 1978 aquavit was a product similar to all other on excise duty on spirits and allied spirits for human consumption, that the products) provides for the levying of an manufacture of spirits other than aquavit excise duty on spirits, the rate of which was virtually non-existent in Denmark, is different according to whether aquavit that the increased rate of Dkr 154.80 per (and schnapps), which benefit from a litre of pure ethyl alcohol affected almost preferential rate, or other spirits are exclusively imported spirits and that that involved. N o difference in taxation on discriminatory taxation constituted an the basis of the origin of the products infringement of the first paragraph of has been established, whether they are of Article 95 or, at least, of the second Danish manufacture or imported. paragraph of Article 95 of the EEC

Treaty. In those circumstances, it found taxation on spirits not only did not that the Kingdom of Denmark was discriminate against foreign products but failing to fulfil its obligations under the in fact imposed on aquavit a higher tax Treaty; consequently, in accordance with burden than that to which other spirits the first paragraph of Article 169 of the were subject. Treaty; it was requested to submit its observations to the Commission. On 26 April 1976, the Danish II — W r i t t e n p r o c e d u r e Government informed the Commission that the judgment of the Court of Justice By application lodged on 7 August 1968, of 17 February 1976 in Case 45/75 the Commission, in implementation of (REWE — Zentrale des Lebensmittel- the second paragraph of Article 169 of Großhandels GmbH v Hauptzollamt the EEC Treaty, brought before the Landau/Pfalz) [1976] ECR 181 Court of Justice the matter of the alleged confirmed that there was no competition failure of the Kingdom of Denmark to or substitution relationship between fulfil its obligations under Article 95 of aquavit and other spirits and that the the EEC Treaty as regards taxation on Danish system of taxation on spirits was spirits. therefore not contrary to Article 95 of the EEC Treaty. The Danish The written procedure followed the Government suggested to the normal course. Commission that that question should The Court, after hearing the report of form the subject-matter of fresh the Judge-Rapporteur and the views of discussions. the Advocate General, decided to open The excise duty on spirits was increased the oral procedure without any as from 21 August 1976 from Dkr 108.60 preparatory inquiry. It requested the to Dkr 130.30 in the case of aquavit (and Commission however to reply in writing schnapps) and from Dkr 154.80 to Dkr to two questions; that request was 185.75 in the case of other spirits. complied with within the prescribed periods after those periods had been On 10 December 1976 the Commission extended. The Danish Government delivered to the Kingdom of Denmark submitted written observations on those the reasoned opinion provided for in the replies. first paragraph of Article 169 of the Treaty. It found in that opinion that by fixing the excise duty on aquavit (and I I I — C o n c l u s i o n s of t h e p a r t i e s schnapps) at a reduced rate as compared with that applicable to other products, The Commission claims that the Court the Kingdom of Denmark had been in should: breach of the first paragraph of Article 95 or, alternatively, of the second — Declare that, by not complying with paragraph of Article 95 of the Treaty. the Commission's opinion requesting The Danish Government was requested it to introduce uniform taxes on to adopt within one month the measures spirits, the Government of the necessary to comply with the Kingdom of Denmark has been in Commission's reasoned opinion. breach of the first paragraph or, alternatively, of the second paragraph By letter of 23 February 1977, the of Article 95 of the EEC Treaty; Danish Government submitted to the Commission certain numerical data — Order the Danish Government to pay showing that the Danish system of the costs.

The Government of the Kingdom of in relation to domestic products but also Denmark contends that the Court those against products which are similar should: to or in competition with those domestic products. It should operate on the basis — Principally, dismiss the application; of objective criteria which are extraneous to all considerations of economic or — In the alternative, declare that the social policy. The prohibition on tax Kingdom of Denmark has been in discrimination laid down in Article 95 breach of Article 95 of the EEC does not allow of any exception and Treaty solely to the extent to which, takes precedence over policies which in the case of one or several spirits, may be followed at a national or the Court considers that, together Community level.

Community level. The tax sovereignty of the Member States has been considerably limited in the interests of intra- IV — Submissions and a r g u m e n t s Community trade; those limitations of the p a r t i e s p u t f o r w a r d relate in particular to the freedom for the during the written national legislature to have recourse to a procedure tax device in order to pursue extra-fiscal objectives. A national tax system should not have secondary effects on the The Commission states that the excise economic activities of traders in the duty levied in Denmark on spirits, which other Member States which are contrary was Dkr 130.30 in the case of aquavit to the attainment of the common market. (and schnapps) and Dkr 185.75 in the case of other alcoholic beverages on 21 August 1976, was increased by Law No The sovereignty of the Member States in 437 of 6 September 1977 to Dkr 167.50 tax matters must be exercised in and Dkr 257.15 respectively as from 7 compliance with the provisions of the

products. This provision· confirms that (a) The function of Article 95 is to barriers to trade expressed by tax eliminate, after the abolition of customs measures which are of such a nature as duties and charges having equivalent to afford direct or indirect protection to effect, the last trade barriers, not only domestic production from competition those against identical imported products by imported products are incompatible

with the Treaty. It follows from the the products, the raw materials used and case-law of the Court that Article 95 is the manufacturing processes. intended to eliminate all discrimination between imported and domestic products which are in whatever manner in Similarity must be appraised from the legitimate confrontation within the point of view of consumers and their common market. needs; the concept of similarity contained in Article 95 is specifically subject to tax requirements, disregarding the physical or chemical properties of the (c) It is not appropriate to use the products in question.

products. It is also important to know (d) As regards the concept of "similar whether the products in question meet products", it follows from the case-law the same needs of consumers or satisfy of the Court that the relationship of the same tastes; however, most products similarity referred to in the first have several possible uses which they paragraph of Article 95 exists where the products in question must normally be may to a greater or lesser extent have in considered as coming under the same common with other products. tax, customs or statistical classification as the case may be and that it is appropriate A very precise definition of similar to compare products which, at the same products is unacceptable; it would give stage of production or marketing, have rise to a definition of the concept of similar characteristics and meet the same similarity within national contexts which needs from the point of view of would result in nine divergent and con-

JUDGMENT OF 27. 2. 1980 — CASE 171/78

COMMISSION v DENMARK

JUDGMENT OF 27. 2. 1980 — CASE 171/78

(a) The Danish system of taxation on decisive point is whether the legislation spirits is not discriminatory: the excise in question has laid down rules involving duty levied on spirits applies without for spirits taxation at a higher rate solely regard to the origin of the products. The because they are imported from other basic condition for the application of Member States; the Danish tax Article 95 is therefore lacking. legislation contains no rule of that kind.

Article 95 in no way imposes a duty of general neutrality of taxation; it refers The preference of consumers for exclusively to discrimination between domestic products is not due to a tax imported products and domestic system which discriminates against products. Discrimination must be linked, imported products: a whole series of in the case of goods, to the crossing of a factors other than price, such as the frontier. flavour of the products and the traditions observed by consumers, determine the choice made by them. The strong position on the Danish market of aquavit (b) The first paragraph of Article 95 produced in Denmark has nothing to do prohibits both "formal" discrimination with special safeguard measures. The resulting directly from the tax provision strength of that position in favour of itself and "real" discrimination. Danish brands of aquavit must be viewed However, in both situations the crossing in the light of purely commercial factors of the frontier constitutes the chargeable linked to certain traditional preferences event giving rise to a higher tax on on the part of consumers. Such a imported products; this is not the case of situation may develop without recourse the Danish legislation. to special measures of tax protection.

Danish producers are not moreover in a The market shares of the various dominant position as regards the manu- products are irrelevant for the purpose of facture of aquavit: throughout Northern judging whether a tax law is in Europe there is a highly developed and conformity with Article 95. The only specialized production of aquavit.

The Court attaches exclusive importance to the fact that both domestic products (g) It follows from the judgment of the and foreign products are offered the Court of 10 October 1978 (Hansen) that same opportunities: the condition of Article 95 does not prevent national tax non-discrimination referred to in Article systems from providing for different 95 is fulfilled when the same rules apply rates for different types of spirits. The to national products and imported reasoning underlying that judgment must products. also apply to the special rate in force in Denmark in the case of aquavit; that cannot be considered to be a system of partial or total exemption but to be a (e) To accept the Commission's inter- system whose legitimate objective is to pretation would imply a considerable create a situation of equality from the extension of the scope of Article 95. The point of view of taxation. chapter of the Treaty devoted to tax provisions assumes that the Member States have retained the power themselves to determine tax policy and According to the same judgment, a pre- taxation; this finding results indirectly ferential national system must apply from Article 99 of the Treaty. without distinction also to spirits from other Member States fulfilling the same conditions as the domestic product; the Danish law complies totally with that The statement that the structure of condition. taxation must not have any effect on the economic activities of traders in other Member States is excessive; Article 99 The judgment explains the function of presupposes the possibility of such an Article 95: its aim is to prevent all influence, the effects of which should discrimination against imported products perhaps be avoided by means of harmo- and not to ensure general tax neutrality. nization.

Commission of the concept of similar to four figures in no way enables the products is incompatible with the assumption to be made that they meet case-law of the Court. the same needs and have the same characteristics from the point of view of consumers. The alleged similarity between aquavit and other spirits Nor is the sub-division into tariff sub- headings by itself decisive. (a) Contrary to the Commission's opinion, the decision whether two As regards spirits more particularly, it is products must be considered as similar necessary to state that the fact that products must be made on the basis of a aquavit and other spirits come under material and not.a formal criterion. tariff heading 22.09 of the Common Customs Tariff means only that those The relationship of similarity must be products may be similar within the appraised in each case on the basis of the meaning of Article 95; on the other actual facts, taking into account certain hand, it is impossible to consider, on the general considerations relating to the basis of their classification under the marketing of the products in question. In same tariff heading, that it is established the recent case-law of the Court of or even probable that they therefore Justice, the appraisal of the facts indeed comply with the condition laid down in takes first place whereas the formal the case-law of the Court that they criterion, in particular the classification should have similar characteristics and of the products in the Common Customs meet the same needs. Tariff, is reduced to the level of a mere factor in the appraisal. (c) As it is necessary to examine, on the basis of a concrete approach, whether (b) The Brussels Nomenclature did not the two products -have the same intend to decide the question whether characteristics and meet the same needs certain goods must be defined as from the point of view of consumers, it identical from the point of view of should be pointed out that aquavit is consumers; its object is to establish a almost always and exclusively consumed precise and unambiguous classification. It at meals, which is not so in the case of does not therefore, as such, contain other spirits. Consumer habits are, in this indications as to whether two products context, important: there is no other true are possibly similar from the material criterion enabling the opinion of point of view within the meaning of the consumers with regard to consumer first paragraph of Article 95. products to be known.

Denmark is practically the only country From the point of view of consumers, in the Community in which aquavit is aquavit and other spirits therefore consumed; for that reason consumer neither meet the same needs nor have the habits in Denmark may be considered, as same characteristics. regards that product, as Community consumer habits. The alleged infringement of the second paragraph of Article 95 (d) Within the context of an "abstract" appraisal of the characteristics of For it to be possible to consider a tax as products, the typical characteristics levied in infringement of the second linked to the flavour of the various paragraph of Article 95 it is necessary for products form the decisive criterion as the excise duty to be levied on products regards spirits for human consumption. from other Member States, for it to be possible for those products to be sub- stituted for national products and for the It follows from the case-law of the Court excise duty to involve the protection of that the presence of ethyl alcohol in domestic production or domestic several products does not make them products. None of these three conditions similar products within the meaning of has been fulfilled in this case. the first paragraph of Article 95; similarly, the method of manufacture and the raw materials used are without (a) The volume of Danish production real importance. The completely decisive of spirits other than aquavit is not so fact from the point of view of consumers negligible that the other spirits must be having to choose between spirits of the considered as coming from other same kind is the typical characteristic Member States. flavour of each of those products. The fact that Danish production of spirits other than aquavit is lower than The various spirits have in Europe well- imports is moreover due in particular to defined areas of use established on the the introduction of the tax system in basis of their characteristic flavour; those question which made it unprofitable to special characteristics determine their maintain the production of various chosen areas of consumption. In the case Danish spirits in view of the competition of aquavit, the determining factor is that from foreign spirits. it is consumed preferably at meals.

(c) In the same way, the Commission (Journal Officiel 1972, C 43, p. 3 and has in no way shown that the duty levied Official Journal 1976, C 309, p. 2) on spirits other than aquavit is protective provides for measures concerning the in nature in favour of aquavit. production of alcohol and intervention systems (price compensation, withdrawal from the market and sale to reserved A pure ad valorem tax cannot be sectors), measures relating to alcoholic considered as involving protection beverages (grant of aid and the against foreign products. imposition of equalization charges), measures of commercial policy and

by t h e C o u r t a n d w r i t t e n the common organization of the market observations in wine, Official Journal 1979, L 54, p. 1). The Community already has appro- priate economic means for settling the In its written observations to the most important problem, that of the questions put by the Court, the compensation for the difference between Commission has in particular emphasized the production costs of brandy and that the essential problem concerns spirits obtained by distilling wine on the competition between spirits obtained one hand and products based on other from wine and spirits obtained from agricultural raw materials, in particular cereals, in view of the considerable cereals, on the other.

pure alcohol. The proposal for a regu- Taxation which is levied on domestic lation on the common organization of products and similar and/or competing the market in ethyl alcohol of agri- imported products within the meaning of cultural origin and additional provisions Article 95 not only at the same rate but

Decision

1 By application of 7 August 1978, the Commission lodged u n d e r Article 169 of the E E C T r e a t y an application for a declaration that the K i n g d o m of D e n m a r k , by applying discriminatory taxation on spirits, has failed to fulfil its obligations u n d e r Article 95 of the E E C T r e a t y .

JUDGMENT OF 27. 2. 1980 — CASE 171/78

2 At the same time, the Commission submitted to the Court of Justice applications against the French Republic and the Italian Republic relating to problems of the same nature. The applications contain, in all three instances, certain general considerations from which it follows that those applications form part of a general action aiming to ensure that the Member States concerned comply with the obligations imposed on them by the Treaty in this respect. It therefore seems appropriate to clarify first of all certain questions of principle common to the three cases as regards the interpret- ation of Article 95 in the light of the special features of the market in spirits.

T h e i n t e r p r e t a t i o n of A r t i c l e 95

3 Under the first paragraph of Article 95 " N o Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products". The second paragraph of that article adds as follows: "Furthermore, no Member State shall impose on the products of other Member States any internal taxation of such a nature as to afford indirect protection to other products".

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 München-Landsberger Straße [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.

7 Whilst the criterion indicated in the first paragraph of Article 95 consists in the comparison of tax burdens, whether in terms of the rate, the mode of assessment or other detailed rules for the application thereof, in view of the difficulty of making sufficiently precise comparisons between the products in question, the second paragraph of that article is based upon a more general criterion, in other words the protective nature of the system of internal taxation.

n These arguments prompt the following reply from the Court. The application of the provisions of Article 95 to specific national situations forming the subject-matter of the applications submitted by the Commission must be examined in the context of the general state of the market in alcoholic beverages within the Community. In this respect it is necessary to take into account three lines of thought:

(a) it is impossible, first of all, to disregard the fact that all the products in question, whatever their specific characteristics in other respects, have common generic features. All are the outcpme of the distillation procedure; all contain, as a principal characteristic ingredient, alcohol suitable for human consumption at a relatively nigh degree of concentration. It follows that within the largest group of alcoholic beverages spirits form an identifiable whole united by common charac- teristics;

(b) in spite of those common characteristics, it is possible to distinguish within that whole products which have their own more or less pro- nounced characteristics. Those characteristics spring either from the raw materials used (in this connexion it is possible to distinguish in particular spirits distilled from wine, fruit, cereals and sugar-cane), or from manu- facturing processes or, again, from the flavourings added. Typical varieties of spirits may in fact be defined by these particular char- acteristics, so much so that some of them are even protected by registered designations of origin;

(c) at the same time, it is impossible to disregard the fact that there are, in the case of spirits, in addition to well-defined products which are put to relatively specific uses, other products with less distinct characteristics and wider uses. There are, on the one hand, numerous products derived from what are known as "neutral" spirits, in other words spirits of all origins including molasses alcohol and potato alcohol; these products

12 Two conclusions follow from this analysis of the market in spirits. First, there is, in the case of spirits considered as a whole, an indeterminate number ot beverages which must be classified as "similar products" within the meaning of the first paragraph of Article 95, although it may be difficult to decide this in specific cases, in view of the nature of the factors implied by distinguishing criteria such as flavour and consumer habits. Secondly, even in cases in which it is impossible to recognize a sufficient degree of similarity between the products concerned, there are nevertheless, in the case of all spirits, common characteristics which are sufficiently pronounced to accept that in all cases there is at least partial or potential competition. It follows that the application of the second paragraph of Article 95 may come into consideration in cases in which the relationship of similarity between the specihc varieties of spirits remains doubtful or contested.

i3 It appears from the foregoing that Article 95, taken as a whole, may apply without distinction to all the products concerned. It is sufficient therefore to examine whether the application of a given national tax system is discrimi- natory or, as the case may be, protective, in other words whether there is a ditterence in the rate or the detailed rules for levying the tax and whether that ditterence is likely to favour a given domestic production. It will be necessary to examine within this framework the economic relationships between the products concerned and the characteristics of the tax systems which torm the subject-matter of the disputes in the case of each of the applications lodged by the Commission.

is Since certain of the defendant Governments have relied upon these statements in order to justify their tax system, the Court has asked the Commission questions as to the compatibility with Community law ot the differences in the rates of tax applied to various categories of alcoholic beverages and as to its intentions in that respect within the context ot the harmonization of tax legislation. The Commission, after re-stating its view that all spirits are similar and its intention to propose the introduction, at least in principle, of a single rate of tax in future Community regulations, draws attention to the fact that the problems linked to the use of certain raw materials, continued high-quality production and the economic structure ot manufacturing undertakings to which the Court referred in the above- mentioned judgment may be resolved by means of aid to producers or systems of compensation between producers, taking into account the. difference in the cost of the raw materials used. It draws attention to the tact that this objective has already been attained within the context ot the common organization of the market in wine as regards spirits obtained by distilling wine. According to the Commission, such mechanisms might safeguard the marketing chances of certain products which are handicapped by production costs, without its being necessary to have recourse tor this purpose to the procedure of variation in the rates of tax.

ie In view of these observations, the Court points out that although it acknowledged in the judgment in the Hansen & Balle case, taking into account the state of development of Community law, that certain tax exemptions or tax concessions are lawful, this is on condition that the Member States using those powers extend the benefit thereof without discrimination to imported products in the same conditions. It is necessary to emphasize that it was acknowledged that those practices were lawtul in particular so as to enable productions or undertakings to continue which would no longer be profitable without these special tax benefits because ot the rise in production costs. On the other hand, the considerations expressed in that judgment cannot be understood as legitimating tax differences which are discriminatory or protective.

i9 As a preliminary, the Danish Government examines the relationship between Article 95, on which the Commission has based its application, and Article 99 on the harmonization of tax legislation. It asks whether the implementation of that harmonization should not take priority over the application of Article 95. It claims that since the Member States have retained the power themselves to determine tax policy and taxation, the effects which a tax system might have on the normal functioning of the common market should be eliminated by virtue of the harmonization of legislation provided for by Article 99. The Commission should not arbitrarily seek to impose such harmonization under Article 95 instead of following the procedure laid down by Article 99.

20 There is no doubt that the disparity in the national tax systems and in particular the differences in the rates of tax which are particularly pro- nounced as regards taxation on spirits constitute an obstacle to the free movement of goods and to the development of trade between the Member States. However, the implementation of the programme of harmonization laid down by Article 99 cannot constitute a preliminary to the application of Article 95. Whatever in fact the disparities between the national tax systems, Article 95 lays down a basic requirement which is directly linked to the

JUDGMENT OF 27. 2. 1980 — CASE 171/78

prohibition on customs duties and charges having an equivalent effect between the Member States in that it intends to eliminate before any har- monization all national tax practices which are likely to create discrimination against imported products or to afford protection to certain domestic products. It therefore appears that Articles 95 and 99 pursue different objectives, since Article 95 aims to eliminate in the immediate future dis- criminatory or protective tax practices, whilst Article 99 aims to reduce trade barriers arising from the differences between the national tax systems, even where those are applied without discrimination.

24 According to the Commission, those figures show that the reduced rate of tax benefits almost exclusively a type of spirit which represents the bulk of domestic production whereas the heaviest rate of tax applies to all other alcoholic beverages of which the majority are imported products (in other words, approximately two-thirds thereof). As a whole, this tax system therefore clearly discriminates against imported spirits. As such, this system is contrary to the first paragraph of Article 95 of the Treaty, according to which a Member State cannot impose on the products of other Member States internal taxation in excess of that imposed on similar domestic products. If the similarity between aquavit and other spirits referred to by the Danish law is not acknowledged, the Commission considers that the difference created by that law is in any case of such a nature as to afford indirect protection to the domestic production of aquavit within the meaning of the second paragraph of Article 95.

JUDGMENT OF 27. 2. 1980 — CASE 171/78

The shares held by the various products on the market are of no importance for the purposes of appraising whether the law is compatible with Article 95. It thus appears that in the system of the Danish law there is no relationship between the fact that goods cross a frontier and the application of a higher rate of tax.

27 The Danish Government recalls in addition that for a certain period alcoholic beverages were subject to a mixed tax system which involved, in addition to a specific duty, the application of an ad valorem duty. The excise duty levied under the present legislation is in fact nothing more than an adjusted ad valorem duty. This fact explains why aquavit, as an inexpensive product, benefits from a more favourable rate of tax than other spirits whose production costs are higher. Moreover, there is nothing to prevent Denmark from re-introducing the old system; a tax applied according to that method would amount to reducing the tax on aquavit even further whereas spirits with a high production cost, such as whisky and cognac, would be taxed even more heavily.

COMMISSION v DENMARK

might if necessary be substituted for it. Moreover, it is necessary to emphasize the contradictory nature of the argument put forward in this respect by the Danish Government.

In fact, of the spirits which are subject to the highest rate of tax under Article 3 of the Danish law, there are several products which, being manu- factured on the basis of neutral alcohol, may be considered as inexpensive spirits, like aquavit. In a system of ad valorem taxation, they should therefore benefit from the same tax advantage as aquavit. The fact that those products are treated as regards taxation in the same way as products with a higher production cost shows that the tax system at present in force does not have the characteristics of ad valorem taxation.

3i The appraisal of the compatibility of the Danish tax system with Article 95 raises a special problem in that the preferential rate laid down by the Danish legislation benefits a single product defined precisely by the law to the exclusion of all other spirits. It is therefore necessary to appraise the existence of either a relationship of similarity or competition between a single product and an indeterminate number of products some of which are identified by the law whereas others are not specified.

32 In this connexion, it is necessary to point .out, first, that of the products subject to the highest rate of tax there are several named beverages the characteristics of which are akin to aquavit in that they are normally manufactured from neutral alcohol and owe their characteristic flavour to added flavouring extracts. It is necessary to assume that those products have been listed expressly among the spirits subject to a higher rate of tax precisely because of their similarity. In the case of those beverages there can therefore be no doubt that there has been an infringement of the first paragraph of Article 95.

35 In fact, as indicated above, the spirituous beverages referred to by the Danish legislation as products obtained by distillation nave sufficient characteristics in common with aquavit to constitute at least in certain circumstances an alternative choice for consumers. Because of their very varied properties, these beverages are likely to be in competition with aquavit at times. The fact that aquavit is preferred in Denmark by consumers as an accompaniment to certain typical meals does not prevent that beverage from still being used for other purposes or from thus being in at least a partial substitution relationship with an indeterminate number of other types of spirit. It may therefore be said that to the extent to which the spirituous beverages on which the highest tax burden is imposed are not beverages which are similar to aquavit within the first paragraph of Article 95 they are in any case in competition with aquavit as referred to in the second paragraph of Article 95.

39 Since the defendant has failed in its submissions, it must be ordered to pay the costs.

On those grounds,

THE COURT

hereby:

1. Declares that, by the application of a discriminatory tax on spirits as follows from Co-ordinated Law No 151 of 4 April 1978, the Kingdom of Denmark has failed, as regards products imported from the other Member States, in its obligations under Article 95 of the EEC Treaty;

2. Orders the Kingdom of Denmark to pay the costs.