C-319/81

3. As the products concerned are either similar to or in competition with one 4. Member States have the right to another — which brings them within adopt, whilst observing the relevant the scope of the second paragraph of directives, a higher rate of VAT on Article 95 of the Treaty — a criterion luxury products as opposed to for the charging of higher taxation, domestic or imported products not such as designation of origin or prov- having that quality, provided, how- enance, which by definition cannot ever, that the criteria chosen to ever be fulfilled by domestic products determine which category of products in the absence of rules protecting is to be more heavily taxed are not their designation of origin or prov- discriminatory as against imported enance, cannot be considered to be products similar to or in competition compatible with the prohibition of with domestic products in the manner discrimination laid down in that contemplated by the second para- provision. graph of Article 95 of the Treaty.

In Case 3 1 9 / 8 1

COMMISSION OF THE EUROPEAN COMMUNITIES, represented by its Legal Adviser, A n t o n i o Abate, acting as A g e n t , with an address for service in L u x e m b o u r g at the office of O r e s t e M o n t a k o , a m e m b e r of its Legal D e p a r t m e n t , Jean M o n n e t Building, K i r c h b e r g ,

applicant,

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supported by T H E UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, represented by J. D. Howes, of the Treasury Solicitor's Department, acting as Agent, with an address for service in Luxembourg at the British Embassy,

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

Advocate General : Sir Gordon Slynn Registrar: P. Heim

gives the following

JUDGMENT

Facts and Issues

I — The facts 1. Background to the dispute The facts of the case, the course of the This action should be seen in the context proceedings and the conclusions, sub- of the attempt to find a judicial solution missions and arguments of the parties to the situations created in the various may be summarized as follows: Member States by the rules on the

The negotiations continued for roughly two years, with no positive result. This outcome was finally acknowledged by II — W r i t t e n p r o c e d u r e the Council of Ministers of 21 October 1981 and led directly to the Commission's decision to bring the matter before the Court. By application dated 22 December 1981, registered at the Court on the following day, the Commission brought the matter The Commission's action against the before the Court of Justice in accordance United Kingdom in Case 170/78 with the second paragraph of Article 169 concerning excise duties on wine and of the EEC Treaty in view of the fact beer may be seen in the same context. that the Italian Government had not complied with the reasoned opinion of 2 February 1979. 2. The Italian system of value-added tax Upon hearing the report of the Judge- Rapporteur and the views of the Besides the Stanford rate, which is at Advocate General, the Court decided to present 15%, the Italian system of value- open the oral procedure without any added tax (VAT) also provides for a preparatory inquiry. It did, however, ask reduced rate and two higher rates. the parties to the proceedings, in a letter dated 20 October 1982, to answer a number of questions to clarify the The reduced rate of 8% is applicable to situation and they did so within the time transactions concerning a range of goods allowed. and services which basically fulfil essential needs.

I l l — C o n c l u s i o n s of the p a r t i e s There are also two higher rates on non- essential goods. The 2 0 % rate is charged on a range of products which, though non-essential, are not judged by the 1. The Commission claims that the Italian legislature to be particularly Court should: marked by their luxury or prestige. The 38% rate is charged on consumer goods which are more clearly luxurious or pres- (a) declare that the Italian Republic by tigious. charging different rates of tax on

spirits on the basis of the criterion of under Italy's tax system a higher rate of designation of origin or provenance, tax is charged on imported spirits than under Decree-Law No 58 of 4 on similar domestic products. March 1977 on value-added tax, has failed to fulfil its obligations under Article 95 of the EEC Treaty as far as products imported from other The Commission refers to the Opinion Member States are concerned; of Advocate General Sir Gordon Slynn in Case 244/80 (Foglia v Novello [1981] ECR 3045) in which French excise duty on liqueur wines was in question. The (b) order the Italian Republic to pay the Italian and French systems resemble one costs. another inasmuch as they both use the criterion of origin and provenance: the Italian in order to support domestic products where they do not satisfy that 2. The Italian Republic contends that the Court should dismiss the Com- criterion and the French in order to mission's application. support domestic products where they do satisfy it. Here again, the Commission claims, the effect is the same, but the national interests to be protected are opposite. IV — S u b m i s s i o n s and a r g u m e n t s of t h e p a r t i e s A further resemblance between the two systems in question may, in the Commission's view, also be seen in the In its application the Commission geographical component of the criterion contends that the Italian system in chosen. When products are taxed or question is contrary to Community law exempted from tax on the basis of their and in particular to Article 95 of the origin or provenance, it is clearly EEC Treaty on the ground that the impossible to apply the more advan- criterion of designation of origin or tageous tax treatment to imports of provenance concerns only imported similar or competing products. The result spirits as domestically-produced spirit is of this is geographical protection of not subject to any similar rules. The domestic products alone, which by being effect of the Italian system is to tax more irreversible and inescapable, is contrary heavily almost all spirits imported from to the principle that taxation should not other Member States (whisky, brandy, be discriminatory, as the Court has armagnac, rum and so forth) thereby constantly stressed. producing a discriminatory or protec- tionist effect. In its judgment of 30 October 1980 in Case 26/80 (Schneider-Import GmbH & Whilst acknowledging that differential Co. KG v Hauptzollamt Mainz [1980] taxation may be imposed provided that ECR 3469 at p. 3486) the Court in fact the rule against discrimination between held that the requirement of non-dis- similar products is observed, the crimination is fulfilled: Commission maintains that domestic and imported spirits are similar or competing products or both within the meaning of ". . . where the arrangements applicable Article 95 of the EEC Treaty and that to spirits imported from other Member

At the present stage of its development Community law allows the national In reply to the Commission's contention legislature to choose the most appro- that the absence of domestically- priate system for taxing consumption for produced spirits " with a designation of achieving certain legitimate objectives of origin or provenance" which is economic and social policy, applying "regulated and protected" results in general principles, on which moreover all discrimination, the Italian Government modern tax systems are based, of con- states that the criterion is an abstract one tributive capacity and tax progressivity. so that imported products which do not Article 95 merely requires, in the Italian satisfy the necessary or sufficient Government's view, that the tax system conditions enabling them to be chosen should be applied without considered high-class goods may in fact discrimination to both domestic products enjoy the same advantages as comparable and those imported from other Member domestic products. Moreover, the fact States. The concept of similarity cannot that similar spirits might not be produced

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JUDGMENT OF 15. 3. 1983 — CASE 319/81

They express highest rate of 2 0 % to imported spirits the choices open to the legislature which not meeting the criteria of regulated the defendant wrongly considers to be a designation of origin or provenance "is matter of discretion and "not liable to fully guaranteed". When the structure of any review", to such an extent that no the markets in question is considered it is check is made as to whether the quite obvious that the 2 0 % rate benefits requirement that the taxation in question the totality of domestically-produced should be neutral is observed. spirits, imports of similar products from other Member States being of marginal importance. Moreover the Commission takes the view that the Italian Government's attempt to assimilate the VAT system ' As to the criteria used to distinguish applied to goods to a system of direct between the products chargeable to the taxation on the tax-paying capacity of tax, namely the quality and luxuriousness those liable does not deserve of the products, the Commission consideration.

spirits. In spite of that, retail şale prices of Italian and foreign spirits have always The Commission then goes on to been much the same and comparable in examine whether the objective of fiscal all respects. Hence the tax-paying policy underlying the Italian legislature is capacity of the various consumers of legitimate. spirits must be the same. The Commission remarks that the It also seems contradictory to have general reference to fiscal objectives recourse to the criterion of popular appears irrelevant for various reasons. By consumer goods and "elitist consumer definition objectives of fiscal policy are

In its rejoinder the Italian Government The Commission confines itself to refutes the Commission's arguments, observing that the judgment of 27 especially as far as the case-law of the February 1980 in Case 169/78 Court is concerned. (Commission v Italy [1980] ECR 385) does not allow the VAT system in question to be endorsed. It contends first of all that it is not correct that the judgment of 14 January Moreover, the system presents an 1981 in Case 140/79 (Chemial Farma- unquestionably aggravating feature, ceutici SpA v DAF SpA [1981] ECR 1) namely that it is invariably charged on and in Case 46/80, cited above, broke almost all imported spirits (whisky and new ground as against all previous brandy) and no others. Viewed from that case-law on Article 95. Quite the angle the system of tax banderoles at contrary, they too fall squarely into that issue in Case 169/78 might be viewed in consistent line of decisions. The Italian a much better light since it was applied Government also believes that the Court to spirits on the basis of the raw material confirmed the principles of its established used, irrespective of their place of origin case-law in its judgment of 27 May 1981 or provenance. Cognac and French marc in Joined Cases 142 and 143/80 de Bourgogne were taxed at exactly the (Amministrazione delle Finanze dello same rate as brandy and Italian-made Stato v Essevi and Salengo [1981] ECR grappa. 1413).

which the tax system under consideration The simply fact is that Italy does not is structured as well as at the relationship produce high-quality spirits (ju st a s lt between that system and trends in does not make Persian carpets or domestic production. produce Russian caviar). But that is absolutely no reason for exempting high- quality spirits (or Persian carpets or caviar) from the taxation to which all The Italian Government maintains that luxury products are subject. the judgments in Chemial and Vinal made case-law clearer on this point in the sense that the discrimination prohibited by Article 95 must be real. On the question of distinguishing criteria the Italian Government also contends that spirits which fulfil the criteria of both a designation of origin and special The Italian Government dwells at length rules are precisely those which are on the non-discriminatory and neutral generally regarded by all consumers as character of the system in issue as being particularly prestigious. These are regards the question whether the not therefore arbitrary and "subjective" products taxed are domestic products or judgments, as market analyses show. come from other Member States and points out the system's objective charac- teristics. The Italian legislature was therefore quite entitled to classify as luxury goods only spirits subject to rules and having a In particular, the object of the system is designation of origin. not to discourage consumption of the goods taxed but to ensure that they are taxed fairly and in accordance with the more general aims of fiscal policy. This Nor can it be said that there is anything case cannot, the Italian Government "contradictory" in distinguishing be- thinks, be considered to be on all fours tween two categories of product both of with Cases 140/79 and 46/80, cited which nevertheless come within the above. category of goods intended for non- essential consumption.

purpose of that distinction being to tax The concept of similarity must be the greater contributive capacity identical for the whole Community and unquestionably evident in the case of must be decided according to objective luxury goods. criteria, based on the purposes which the product serves for consumers. The United Kingdom contends that the two categories of product, those which have a designation of origin and those which do not, are in competition and thus fill Secondly, the Italian Government replies within the provisions of Article 95 (2). to the Commission's argument that the Italian system of VAT on spirits cannot be lawful as it is not designed to implement objectives of economic or industrial policy of the kind taken into consideration by the Court in its The distinction on which the different judgments in Chemial and Vinal. That rates of VAT are based does not objection appears, the Government correspond, the United Kingdom states, thinks, to be based on a misap- to any distinction in quality or objective prehension. The condition that tax criterion. It is based entirely upon a systems charging different rates of tax on difference in the policies of the similar products should be introduced in legislatures in the territories in which the pursuance of lawful objectives cannot be spirits are produced. The tax distinction taken to mean that there should in each thus established favours all spirits case be a non-fiscal aim (of economic or produced in Italy since the Italian industrial policy) and that that aim legislature has ensured that no should in substance be capable of being domestically-produced spirit can ever be judged positively. What is really subject to the higher rate. This case is required, it is suggested, is that the tax therefore clearly distinguishable from system in question should not pursue Vinal. aims contrary not only to Article 95 but also to other rules or principles of Community law or exigencies of a policy adopted in a Community context. Besides that purely negative requirement, there is no other requirement to be Conversely, since imports into Italy of fulfilled in order that a system of spirits without a designation of origin differential taxation may be lawful, from other Member States are of provided, of course, that it complies with marginal importance, the distinction the fundamental condition that the substantially corresponds to a distinction distinction drawn between the various between spirits produced domestically categories of product taxed at different and those which are imported. rates should be based on objective, neutral and non-discriminatory criteria which are fully satisfied in this case.

The United Kingdom therefore submits that the Italian system at least affords "Which spirits imported from other indirect protection from competition Member States are taxed at the 18% and from such spirits. 3 5 % rates? What was the quantity of those products imported from 1977 to 1981 compared with the previous period?"

V — Answers to the questions raised The Commission produces tables showing that of the total volume of imports in 1981 (106 162 hectolitres of spirit at 1. The first question reads as follows: 100% volume), 98.67% of the spirits from the United Kingdom and France were taxed at the 3 5 % rate (now 38%) whilst the lower rate of 18% (now 20%) "Which Italian spirits are taxed at the was charged on the remaining 1.33%. 18% rate and which at the 3 5 % rate?"

The Italian Government replies that at In particular, imports into Italy of spirits the moment no spirits, apart from gin, taxed at the 3 5 % and 18% rates of VAT are made in Italy, which meet the are as follows:

COMMISSION v ITALY

(a) VAT at 35% imports from Community countries Hectolitres of alcohol during 1975 to 1981 whilst emphasizing at 100% volume that it is not possible to provide precise Gin 2 220 figures on the composition of imports of spirits subject to the 20% rate.

JUDGMENT OF 15. 3. 1983 — CASE 319/81

held that all spirits are similar or in the United Kingdom, and wine-based competition within the meaning of spirits, which comprise a high proportion Article 95 of the Treaty. of the domestically-produced product, satisfy the same or similar consumer needs. The Italian Government believes that not ali spirits may be considered to be identical or similar products. It believes 4. In the fourth question the parties are in particular that a clear distinction must asked to: be drawn between wine-based spirits and cereal-based spirits. They have different organoleptic properties and in the "Produce, by common agreement if consumer's view meet different needs. possible, a table of average retail prices showing the prices without VAT of a selection of spirits which they consider to be representative of Italian-made spirits On the other hand the Italian and spirits imported from the other Government does not think that different Member States in question." properties may be attributed to domestic and imported products falling into the same category of spirits and it cannot be By common agreement the parties (the contended that they meet different Commission and the Italian Government) needs. have drawn up a list (attached to the replies) of average retail prices (with and without VAT) of a selection of products representative of the Italian market. As regards the difference in this case between the two rates of VAT, it is in fact based on the fulfilment or non- The United Kingdom, however, regrets fulfilment of two precise conditions (a that it has not been possible to achieve product must have a designation of common agreement on the figures origin and be governed by specific requested. It has however produced a production standards) which are likely to table showing certain information. make spirits which fulfil them products of superior quality.

Secondly, the Commission feels that the actual impact of discriminatory taxes on It considers in particular the case of similar or competing products imported whisky which from the comparison of from other Member States need not be imports in the two years prior to the taken into account. In previous adoption of the measure in question judgments the Court itself has rejected (1975 and 1976) with those of the last all arguments seeking to make the two years (1980 and 1981) shows that application of Article 95 dependent on there was an increase of 21.88%. It import trends or the results of any emphasizes, however, that while market research or statistical evidence consumption of the imported product that a particular tax system has a increased so markedly, consumption in protective effect. Otherwise the general declined or remained stationary. prohibition of tax discrimination would be inoperative. On the other hand, according to the United Kingdom, the import figures illustrate the reduced rate of increase in the quantities of Scotch whisky and gin imported into Italy since the introduction Having said that, and accepting that of the relevant decree-law in 1974. The statistical considerations cannot be United Kingdom submits that this effect relevant for the purposes of Article 95, may well be exacerbated by the bigger the Commission does not deny that, difference in the rates of VAT applicable despite the charging of at least four since July 1982. discriminatory taxes on alcohol, including VAT, imports into Italy of Scotch and Irish whisky increased in the period 1977 to 1981. The increase in imports of those products is even more 6. The sixth question is as follows: evident if the figures for 1971 and 1981 are compared. "The parties are requested to produce a table comparing production and consumption levels in Italy of gin and Italian spirits." Still, it is undeniable too that in the period 1975 to 1981 Italian production of spirits remained at the same levels On the consumption of Italian gin the whilst exports of Italian spirits increased Commission provides the following table considerably, from 13 600 hectolitres of drawn up ' by common agreement alcohol at 100% volume in 1975 to between the parties in question:

Decision

1 By application lodged at the C o u r t Registry on 23 D e c e m b e r 1981 the Commission of the E u r o p e a n Communities b r o u g h t an action before the C o u r t u n d e r Article 169 of the E E C T r e a t y for a declaration that by applying to spirits in the case of v a l u e - a d d e d tax ( V A T ) a system of

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differential taxation on the basis of designation of origin or provenance, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty.

2 Apart from the standard rate of tax the Italian system of VAT provides for a reduced rate and two higher rates. The first higher rate, which was 18% when the action was brought, was increased to 20 % by Decree-Law N o 697 of 1 October 1982 (Gazzetta Ufficiale della Repubblica Italiana N o 273 of 4 October 1982). It is charged on a range of products which the Italian legislature judges to be non-essential goods. The other higher rate, which is applied to products which the national legislature considers to be items of luxury or prestige, was 3 5 % when the action was brought and increased to 38% by Decree-Law N o 697 of 1 October 1982.

3 By Decree-Law N o 58 of 4 March 1977 (Gazzetta Ufficiale della Repubblica Italiana No 70 of 14 March 1977), converted into Law N o 183 of 9 May 1977 (Gazzetta Ufficiale No 129 of 13 May 1977) and amended by Decree-Law N o 697 of 1 October 1982 (Gazzetta Ufficiale N o 273 of 4 October 1982), all spirits are taxed at the higher rates. However, a distinction is made between them inasmuch as gin and spirits having a designation of origin or provenance regulated or protected by specific measures in the territory in which they are produced are taxed at the rate of 3 5 % , now 3 8 % , whereas other spirits are taxed at the rate of 18%, now 20%.

7 The Commission, which is supported in its submissions by the United Kingdom, contends in substance that the effect of the system of differential taxation is to tax almost all spirits imported from other Member States more heavily than almost all Italian-made spirits and thus to protect domestic production. Whilst it admits that Member States may adopt different rates of taxation even for similar or competing products, provided that the conditions laid down by the Court in its judgment of 14 January 1981 in Case 46/80 (SpA Vinal v SpA Orbat [1981] ECR 77) are observed, the Commission considers that the criteria selected by the Italian Government do not meet those conditions. It contends that the criterion relating to regulated designation of origin or provenance has the effect of preventing by definition almost all imported spirits from being taxed at the less high rate whilst it affords that advantage to almost all Italian production whereas the fact that the designation of origin or provenance of spirits is protected by other Member States does not make them sufficiently different from Italian-made spirits to warrant different treatment. T o support that contention the Commission points out that the prices before tax of certain imported spirits and certain Italian products are comparable. Such a comparison contradicts the Italian Government's statement that the products subject to the highest rate are consumed by customers who prefer luxury or prestige products and who have greater tax-paying capacity.

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io Spirits protected by a designation of origin or provenance belong, it is claimed, precisely by reason of that characteristic to the last category of goods which for that reason are particularly sought out by the more highly privileged social groups. Their higher taxation is therefore meant "simply to tax more heavily, for reasons of distributive justice, a luxury commodity the consumption of which is in itself an indication of greater contributive capacity". The system of taxation in question thereby meets the requirements of objectivity and neutrality which are necessary for justifying, with regard to Article 95, differential taxation of similar or competing products.

JUDGMENT OF 15. 3. 1983 — CASE 319/81

1 1 As a point of fact the Italian Government further observes that domestically- produced gin, the volume of which is higher than that of imported products, is taxed at the highest rate for the same reasons. It also maintains that the higher taxation of spirits with a regulated- designation of origin or prov- enance has not had the effect, prohibited by the second paragraph of Article 95, of protecting other products. The figures produced on both sides show in fact that total imports into Italy from other Member States, especially the United Kingdom and France, of both gin and spirits having a designation of origin or provenance increased considerably between 1971 and 1981.

12 Before the various points of view put forward in this dispute are examined it should be mentioned that these proceedings, as is shown by the terms of the application and as was confirmed by the Commission at the hearing, do not concern the taxation of gin but only the taxation of spirits having a designation of origin or provenance, regulated or protected by specific measures in the territory in which they are produced.

ie As the Court had repeatedly held inter alia in its judgments of 27 February 1980 in Cases 160/79 Commission v France, 169/78 Commission v Italy and 171/78 Commissions Denmark ([1980] ECR 347, 385 and 447), amongst all spirits there is an indeterminate number of beverages which must be regarded as similar products within the meaning of the first paragraph of Article 95 and even where is it impossible to perceive a sufficient degree of similarity between the products concerned, there are nevertheless characteristics common to all those spirits which are sufficiently marked for it to be said that they are at least partly or potentially in competition. That is sufficient for it to be concluded that taxation of them must not have the effect of protecting domestic products. For that purpose it is necessary to take into consideration the potential market of the products in question in the absence of protectionist measures and to ignore comparisons of consumption and import figures.

i9 Furthermore, it must not be overlooked that, although some designations of origin or provenance may be such as to give the products profiting from them a reputation for quality, such designations do not thereby generally and automatically confer on the spirits to which they apply the character of consumer goods of luxury or prestige. That is particularly true when they do not have that character in the Member State in which they originate.

20 If, however, the Italian legislature's presumption that because a product has a designation of origin or provenance it must be one of luxury or prestige were ever to correspond in any given Member State to previous habits of consumption (which it has not been possible to demonstrate), it must be remembered that the purpose of creating a common market in which goods move freely in undistorted conditions of competition in accordance with Articles 2 and 3 of the Treaty is to eliminate such entrenchment of habits of consumption by ensuring that all consumers have as far as possible equal access to all Community products.

2i Finally, it must be emphasized that the considerations set out above by no means fetter the ability of Member States to adopt, whilst observing the relevant directives, a higher rate of VAT on. luxury products as opposed to domestic or imported products not having that quality, provided, however, that the criteria chosen to determine which category of products is to be more heavily taxed are not discriminatory as against imported products similar to or in competition with domestic products in the manner contemplated by the second paragraph of Article 95.

2. Orders the defendant to pay the costs.

Mertens de Wilmars Pescatore O'Keeffe Everling

Mackenzie Stuart Bosco Koopmans Due Bahlmann

Delivered in open court in Luxembourg on 15 March 1983.

P. Heim J. Mertens de Wilmars Registrar President