C-140/79

DAF SPA, whose registered office is in San Giorgio Piacentino,

on the interpretation of Article 95 of the EEC Treaty in relation to Italian legislation concerning a special revenue charge on denatured alcohol,

THE COURT

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

Advocate General: H. Mayras Registrar: A. Van Houtte

gives the following

I — Facts and written procedure On 19 January 1979 Chemial Farma- ceutici applied to the Pretura, On 18 July 1978 DAF SpA, whose Castell'Arquato, for an order requiring registered office is in San Giorgio DAF to supply the agreed quantities of Piacentino, submitted to Chemial synthetic anhydrous alcohol at the Farmarceutici SpA, whose registered agreed price of LIT 30 000 per office is in Turin, an offer for the sale of hectolitre. 20 hectolitres of denatured imported synthetic anhydrous alcohol having an By order of 6 September 1979 the alcoholic strength of 90° ; the firm selling Pretura, Castell'Arquato, stayed the price of LIT 30 000 per hectolitre of proceedings and submitted the following pure alcohol included the special revenue questions to the Court of Justice for a charge ("diritto erariale") on denatured preliminary ruling pursuant to Article ethyl alcohol imposed by Decree-Law 177 of the EEC Treaty: ("Decreto Legge") No 1200 of 6 October 1948 (Gazzetta Ufficiale No " 1 . A. Is the first paragraph of Article 233 of 6 October 1948), amended by 95 of the EEC Treaty to be Decree-Law ("Decreto Legge") No 836 construed in such a manner as to of 16 September 1955 (Gazzetta render unlawful and therefore Ufficiale No 215 of 17 September 1955), prohibited a national system of at a rate of LIT 6 000 per hectolitre of taxation which provides for the pure alcohol. application to a product imported Chemial Farmaceutici accepted that offer from the EEC (synthetic ethyl on 27 July 1978. alcohol exclusively intended, after denaturing, for chemical Delivery was to be effected by 15 and industrial use and therefore September 1978. not suitable for human consumption) of a special duty Before that date the special revenue far greater than that applied to a charge was raised from LIT 6 000 to LIT domestic product with the same 12 000 per hectolitre of pure alcohol by characteristics and the same tariff Article 3 of Law No 506 of 18 August classification (22.08/300) (ethyl 1978, amending the tax arrangements for alcohol obtained by fermentation alcohol (Gazzetta Ufficiale No 247 of and likewise intended, after 4 September 1978). denaturing, for chemical and

industrial use and not suitable for Pursuant to Article 20 of the Protocol on human consumption) for the sole the Statute of the Court of Justice of the reason that the raw materials EEC written observations were submitted from which the two types of on 14 November 1979 by the alcohol are extracted are Commission of the European Com- different and the methods of munities, represented by its Legal extraction are therefore different? Adviser, A. Abate, and on 7 December 1979 by Chemial Farmaceutici, the plaintiff in the main action, represented B. Is the national system of taxation by G. M. Ubertazzi and F. Capelli, unlawful as described above even members of the Milan Bar. if, theoretically, it does not apply in a discriminatory manner to the same product with reference to On hearing the report of the Judge- the raw material from which it is Rapporteur and the views of the extracted, in so far as both Advocate General the Court decided to imported and home-produced synthetic ethyl alcohol are taxed open the oral procedure without any to the same extent and, similarly, preparatory inquiry. both imported and home- produced ethyl alcohol obtained by fermentation are subject to the same charge? II — Written observations sub- mitted to the Court 2. Alternatively, if the answer to Question 1 is in the negative, is the second paragraph of Article 95 of the EEC Treaty to be construed in such Chemial Farmaceutici, the plaintiff in the a manner as to render unlawful and main action, considers that the fiscal discrimination at issue in the main action therefore prohibited — because it is only an additional example of a well- protects domestic production to the established protectionist system intended detriment of Community production indirectly to favour the national product — a national system of taxation by increasing the cost of importing an applied in accordance with the identical or similar product from other criteria referred to in Question 1 and Member States. on the products mentioned in that question, taking into account the fact that the product subject to the greater charge (synthetic ethyl alcohol) is exclusively imported from Certain questions of fact the other States of the EEC, whilst that subject to the lesser charge (ethyl alcohol obtained by fer- mentation) is produced in Italy and (a) Under the Italian legislation ethyl competes with the former?" alcohol obtained synthetically from raw materials extracted from the earth, mainly from petroleum, must be denatured and may be used only for The Order made by the Pretura, chemical and industrial purposes. Castell'Arquato, was received at the However, chemically, it is not possible to Court Registry on 10 September 1979. draw any distinction between alcohol

produced synthetically and alcohol Thefirstquestion obtained by means of fermentation. The latter is normally used for human consumption, in particular the type known as second-grade alcohol which is (a) Denatured ethyl alcohol extracted derived mainly from the distillation of from mineral products (hydrocarbons) wine, grape marc and fruit; alcohol and denatured ethyl alcohol obtained produced by fermentation and known as from agricultural products share the first-grade alcohol, being derived from same chemical characteristics. The only sugar-cane molasses and sugar-beet difference is in the amount of radio- molasses, can be used for human activity which is higher in the case of consumption but can also be denatured ethyl alcohol manufactured from agri- and used for industrial and chemical cultural products than in the case of purposes. ethyl alcohol extracted from minerals. Thus, as a matter of chemistry and a matter of law, ethyl alcohol of agri- cultural origin is not just similar but identical to alcohol of mineral origin. (b) All types of alcohol, whether produced by fermentation or synthetically, intended for industrial and chemical uses are exempted from the manufacturing tax and ordinary excise (b) As a result of this similarity duty which are imposed on alcohol between them, those two categories of intended for human consumption. In products constitute a single type or class. order to prevent any fraud the Italian Moreover, they come under a single regulations require alcohol intended for subheading, subheading 22.08 B, of the industrial or chemical uses to be Common Customs Tariff (ethyl alcohol denatured under the supervision of the or neutral spirits, undenatured, of a Ufficio Tecnico Imposte di Fabbri- strength of 80° or higher). cazione (Technical Office for Manufac- turing Taxes). Article 4 (2) of Decree-Law No 836 of 16 September 1955 increased to LIT 6 000 per hectolitre of pure alcohol the rate of the (c) The Italian fiscal legislation singles special revenue charge on denatured out a subgroup, namely ethyl alcohol alcohol, originally fixed at LIT 1 000 by derived from hydrocarbons, solely for Decree-Law No 1200 of 6 October the purpose of a protectionist policy 1948; however, the same provision which is incompatible with the common retained the rate of LIT 1 000 per market. hectolitre for denatured alcohol produced from molasses and material treated as molasses. The rate of the special revenue charge was increased That protectionist aim is apparent from from LIT 6 000 to LIT 12 000 per the fact that Italy possesses a flourishing hectolitre of pure alcohol by Law No industry in alcohol obtained from agri- 506 of 18 August 1978. Denatured alcohol produced synthetically is thus cultural products, but no industry in taxed much more heavily than denatured alcohol extracted from hydrocarbons. It alcohol produced by means of fer- is underlined by the fact that mentation. Italy, however, does not Decree-Law No 836 of 16 September produce any synthetic alcohol. 1955 makes the tax relief subject to a condition that the denaturing of alcohol

must be supervised by representatives of (f) Article 95 is a rule which the revenue authorities, who can supplements the prohibitions laid down obviously operate only in Italy. The in Article 9 et seq. of the Treaty. The differentiation between types of alcohol concept of a single market is crucial. In on the basis of the raw materials used relation to Article 95, it means that a turns out to be the first step required in product of foreign origin may not be order to arrive at a result which subjected to internal taxation in excess of privileges certain national interests to the that imposed on a similar domestic detriment of other Community interests. product. The prohibition laid down in Article 95 implies the illegality, from the (d) The aims of Article 95 of the point of view of Community law, of a Treaty have been clearly identified in the tax on ethyl alcohol derived from the decisions of the Court of Justice. That distillation of hydrocarbons, a product provision seeks to eliminate all obstacles which exists only as an imported of a fiscal nature which may impede the product, charged at a higher rate than free movement of goods within the the tax which is imposed on the product Common Market and to ensure that the obtained from agricultural materials, application of internal taxation does not which is commonly produced in Italy. have the result that in one Member State products originating in other Member States are subject to taxation in excess of (g) There is a link between the function that imposed on similar domestic and tenor of Article 95 and the products or to taxation of such a nature prohibition of quantitative restrictions as to afford protection to other domestic laid down in Article 30 of the Treaty.

needs. The similarity therefore relates solely to the characteristics of the (a) Only the first paragraph of Article products per se, irrespective of any other 95 is applicable to the dispute in the factor. The decisive factor is not so much main action, since it is a question of the similarity of a product in its various classes of products which are inter- aspects, including the manufacturing changeable and basically identical. process and the raw materials used, but rather the extent to which it is inter- changeable with other products as (b) In any case, it must be remembered regards consumption thereof. that the second paragraph of Article 95

seeks to prevent Member States from These facts confirm not merely the favouring, by means of measures of a similarity but the actual identity of fiscal nature, domestic products to the synthetic alcohol and agricultural alcohol detriment not of similar products, but from the point of view of the merely competing products, from other requirements which these products are Member States. That aim must a fortiori capable of fulfilling. Both types of be taken into consideration in the alcohol are furthermore grouped under context of the dispute in the main action, subheading 22.08 of the Common in which the products at issue are not Customs Tariff. merely comparable or similar, but identical. (b) Denatured alcohol is merely ethyl alcohol to which a denaturing product The Commission's observations may be has been added in order to alter its taste summarized as follows: and prevent its use for human consumption. The reasons for denaturing the alcohol are essentially of a fiscal The facts nature, since denatured alcohol intended for industrial use is not liable to the taxation imposed on alcohol intended for (a) The Commission recalls that pure human consumption. ethyl alcohol is obtained by distilling products of the soil (cereals, wine, grape marc, fruit, potatoes, sugar-cane, beet, All kinds of denatured alcohol, like the molasses from cane or beet, wood, etc.) pure alcohol from which they are or by synthesis of products of the obtained, are not merely similar but substrata (petroleum or coal). Although identical. They are all grouped under the kinds of alcohol are of differing subheading 22.08 A of the Common origin, namely agricultural or mineral, Customs Tariff (denatured spirits they are identical from a chemical point (including ethyl alcohol and neutral of view (C2H5OH) ; in the finished state spirits) of any strength). their origin can be identified only by means of delicate and complicated chemical analysis based on their degree (c) Under the Italian tax system of radioactivity. Where the degree of denatured alcohol is subject neither to purity obtained at the end of the the manufacturing tax nor to ordinary distilling or synthesising procedure is the duty. On the other hand, it does bear the same, ethyl alcohols are thus perfectly special revenue charge, fixed at LIT interchangeable and they may all be 1 000 per hectolitre of pure alcohol employed without distinction for the in the case of alcohol produced same purposes. Ethyl alcohol is used domestically from molasses, similar sub- chiefly in products for human stances, sorghum and sugar-cane and at consumption (alcoholic beverages and LIT 12 000 per hectolitre in the case of pharmaceutical and food products) and other types of alcohol, in particular for industrial purposes (paints, enamels, synthetic alcohol. solvents, cosmetics and perfumes, essences, plastic products etc.). For This differential tax treatment is purely economic reasons the legislation explained by the fact that in Italy all the of two Member States, one of which is Italy, expressly prohibits the use of denatured ethyl alcohol consumed synthetic ethyl alcohol in preparations (655 038 hectolitres of anhydrous intended for human consumption. alcohol in 1977) comes from domestically produced alcohol, most of

The lower rate of the special revenue The legal aspects charge directly favours Italian pro- duction of denatured ethyl alcohol from sugar-beet molasses, and indirectly favours Italian production of sugar-beet (a) The tax system to which the and sugar-beet molasses. disputed special revenue charge belongs may be regarded as compatible with the first paragraph of Article 95 of the Treaty only if the more favourable rate (d) O n 31 July 1978 the Commission of LIT 1 000 per hectolitre of pure adressed a reasoned opinion to the alcohol were applied to identical or Italian Republic under Article 169 of the similar products imported into Italy from EEC Treaty, inviting the Italian the other Member States, including Government to amend the provisions on denatured ethyl alcohol of synthetic the special revenue charge within two origin. months so as to make them compatible , with Article 95 of the Treaty. As no action has been taken on that reasoned opinion, the Commission intends shortly (b) The first two questions submitted to to take proceedings before the Court of the Court call for the following answer: Justice.

With reference to Article 95 of the EEC Treaty, it should be noted that in important respects synthetic alcohol is III — Oral procedure objectively different from alcohol of agricultural origin, particularly as regards production conditions and price structures. It is clear from the judgment of the Court of 27 February 1980 in Chemial Farmaceutici SpA, the plaintiff Case 170/78 Commission v United in the main action, represented by Kingdom [1980] ECR 417 that in such a G. M. Ubertazzi and F. Capelli, the situation it is extremely difficult to Government of the Italian Republic, establish a proper tax relationship represented by M. Conti, Avvocato dello between the two types of product. Stato, and the Commission of the European Communities, represented by A. Abate, presented oral argument and replied to questions from the Court at In any event, the tax system at issue in the hearing on 13 March 1980. the main action is perfectly consistent with Article 95 of the Treaty as interpreted by the Court of Justice; in particular, the Court has recognized that The Government of the Italian Republic in the context of domestic tax legislation observed, with regard to the facts of the the Treaty does not prohibit the case, that whilst there is at present no differential taxation of products capable significant production of synthetic of serving the same economic ends, alcohol in Italy, there is no real obstacle, provided that such taxation is neither either natural or physical, or inherent in discriminatory nor protectionist. Since the industrial structures which impedes Article 95 does not limit the fiscal the development of such production. The independence of Member States, they present situation is the result of a are entitled to accord special tax legitimate choice of economic policy, in treatment to products which may be pursuit of which the instrument of regarded as identical or similar, whether taxation has been used. Further, the it be a question of actual or potential Italian system of taxing denatured production; in such a case the States alcohol does not treat synthetic alcohol employ a legitimate instrument of as an independent category for tax economic policy which is designed to purposes. The special revenue charge of distinguish between different domestic LIT 12 000 per hectolitre of pure alcohol products and, in particular, to achieve is borne not only by synthetic alcohol, market conditions which will ensure a but also by most other types of reasonable level of employment and denatured alcohol. Lastly, the fact that income for agricultural producers of Chemial Farmaceutici refused DAF's certain raw materials.

2 These questions have been submitted in the context of civil proceedings concerning the performance of a contract concluded between 18 and 27 July 1978 between the plaintiff in the main action, Chemial Farmaceutici SpA, and a producer and importer of alcohol, DAF SpA, relating to the supply of a consignment of imported denatured synthetic alcohol.

CHEMIAL FARMACEUTICI v DAF

3 The papers in the case reveal that in July 1978 Chemial placed on order with DAF for a limited quantity of denatured synthetic alcohol. DAF drew Chemiaľs attention to the fact that a special revenue charge of LIT 6 000 per hectolitre was charged on synthetic alcohol, whilst on its own alcohol produced by fermentation, which was perfectly interchangeable with the synthetic alcohol requested, the special revenue charge was payable at the rate of only LIT 1 000 per hectolitre. However, Chemial insisted, for technical reasons, on obtaining alcohol of synthetic origin and by letter dated 18 July 1978 DAF offered it the goods requested at the "price of LIT 30 000 per hectolitre, including the special revenue charge (LIT 6 000 per hectolitre)". Chemial accepted that offer by letter dated 27 July 1978 in which a "price of LIT 30 000 per hectolitre, including the special revenue charge" was agreed on. Under the terms of the contract the goods were to have been collected by 15 September 1978.

4 It is not disputed that as a result of the Law of 18 August 1978 the special revenue charge on denatured synthetic alcohol was raised to LIT 12 000 per hectolitre. By a letter dated 7 September 1978 DAF informed Chemial of this fact, requesting it to consider the offer of 18 July 1978 as null and void, unless it was prepared to bear the burden of the additional amount of tax. . Chemial insisted on performance of the contract according to the terms agreed on, arguing that since imported synthetic alcohol was involved the increase in the tax was illegal as being contrary to the provisions of the law of the European Community, and it commenced proceedings in the appro­ priate civil court with a view to obtaining performance of the contract.

B. Is the national system of taxation unlawful as described above even if, theoretically, it does not apply in a discriminatory manner to the same product with reference to the raw material from which it is extracted, in so far as both imported and home-produced synthetic ethyl alcohol are taxed to the same extent and, similarly, both imported and home-produced ethyl alcohol obtained by fermentation are subject to the same charge?

2. Alternatively, if the answer to Question 1 is in the negative, is the second paragraph of Article 95 of the EEC Treaty to be construed in such a manner as to render unlawful and therefore prohibited — because it protects domestic production to the detriment of Community production a national system of taxation applied in accordance with the criteria referred to in Question 1 and on the products mentioned in that question, taking into account the fact that the product subject to the greater charge (synthetic ethyl alcohol) is exclusively imported from the other States of the EEC, whilst that subject to the lesser charge (ethyl alcohol obtained by fermentation) is produced in Italy and competes with the former?"

CHEMIAL FARMACEUTICI v DAF

The jurisdiction of the Court

7 In its oral observations the Italian Government put in issue the admissibility of the request for a preliminary ruling submitted by the Pretura, Castell'Arquato. It raises the question whether the action brought before the national court is not really a fictitious dispute and whether the procedure under Article 177 has not been employed in this case to impeach the Italian State in the absence of any actual dispute giving rise to questions of Community law as between the parties. In these circumstances the Italian Government asks whether the situation should not be compared to that which formed the subject-matter of the judgment of the Court of 11 March 1980 in Case 104/79 Foglia v Novello [1980] ECR 745 in which the Court held that it had no jurisdiction to give a ruling on the questions put by the national court.

n The applicant's position is supported by the Commission which has expressed the opinion that, despite the different origins of the two products in question — namely synthetic alcohol, which is derived in particular from petroleum, and alcohol obtained by fermentation, which is produced by distilling products of the soil (cereals, wine, fruit, potatoes, beet and molasses) — the two kinds of alcohol in question are chemically identical and fully inter- changeable in their uses. There is thus not only similarity between these two products but actual identity in regard to the needs which the two products are called upon to fulfil. Furthermore, the two kinds of alcohol fall within the same tariff subheading, 22.08 A, under the description "denatured spirits (including ethyl alcohol and neutral spirits) of any strength". In the absence of production of synthetic alcohol in Italy, the difference in the rate of tax prescribed by Italian law for denatured synthetic alcohol on the one hand and denatured alcohol obtained by fermentation on the other has the result of preventing practically all imports of synthetic alcohol from other Member States and of directly favouring national production of alcohol by fermen- tation. The Commission thus considers that, being a product similar to denatured alcohol obtained by fermentation, denatured synthetic alcohol imported from other Member States should qualify for the same rate of tax as the former.

12 The Italian Government recalls that in a number of judgments the Court has recognized that the Member States may lay down differing tax arrangements, even for identical products, on the basis of objective criteria such as the conditions of production and the raw materials used (judgment of 22 June 1976 in Case 127/75 Bobie [1976] ECR 1079; judgment of 10 October 1978 in Case 148/77 Hansen [1978] ECR 1787; judgment of 8 January 1980 in Case 21/79 Commissions Italy [1980] ECR 1). According to the Court, such arrangements are compatible with the Treaty if they are laid down on the basis of objective factors and are not discriminatory or protective in their nature.

15 Differential taxation such as that which exists in Italy for denatured synthetic alcohol on the one hand and denatured alcohol obtained by fermentation on the other satisfies these requirements. It appears in fact that that system of taxation pursues an objective of legitimate industrial policy in that it is such as to promote the distillation of agricultural products as against the manu- facture of alcohol from petroleum derivatives. That choice does not conflict with the rules of Community law or the requirements of a policy decided within the framework of the Community.

16 The detailed provisions of the legislation at issue before the national court cannot be considered as discriminatory since, on the one hand, it is not disputed that imports from other Member States of alcohol obtained by fermentation qualify for the same tax treatment as Italian alcohol produced by fermentation and, on the other hand, although the rate of tax prescribed for synthetic alcohol results in restraining the importation óf synthetic alcohol originating in other Member States, it has an equivalent economic effect in the national territory in that it also hampers the establishment of profitable production of the same product by Italian industry.

JUDGMENT OF 14. 1. 1981 — CASE 140/79

17 The reply to the questions submitted by the national court should therefore be that tax arrangements which impose heavier charges on denatured synthetic alcohol than on denatured alcohol obtained by fermentation on the basis of the raw materials and the manufacturing processes employed for the two products are not at variance with the first paragraph of Article 95 of the EEC Treaty if they are applied identically to the two categories of alcohol originating in other Member States.

1. Tax arrangements which impose heavier charges on denatured synthetic alcohol than on denatured alcohol obtained by fermentation on the basis of the raw materials and the manufacturing processes employed for the two products are not at variance with the first paragraph of Article 95 of the EEC Treaty if they are applied identically to the two categories of alcohol originating in other Member States.

CHEMIAL FARMACEUTICI v DAF

2. Where, by reason of the taxation of synthetic alcohol, it has been impossible to develop profitable production of that type of alcohol on national territory, the application of such tax arrangements cannot be considered as constituting indirect protection of national production of alcohol obtained by fermentation within the meaning of the second paragraph of Article 95 of the EEC Treaty on the sole ground that their consequence is that the product subject to the heavier taxation is in fact a product which is exclusively imported from other Member States of the Community.

Mertens de Wilmars Pescatore Koopmans

Mackenzie Stuart O'Keeffe Bosco Touffait

Delivered in open court in Luxembourg on 14 January 1981.