C-78/82

In Case 7 8 / 8 2

COMMISSION OF T H E EUROPEAN COMMUNITIES, r e p r e s e n t e d by its Legal Adviser, René-Christian Beraud, acting as Agent, assisted by Eugenio de M a r c h , a m e m b e r of its Legal D e p a r t m e n t , with an address for service in L u x e m b o u r g at t h e office of Oreste M o n t a k o , J e a n M o n n e t Building, Kirchberg,

applicant, v

ITALIAN REPUBLIC, represented by A r n a l d o Squillante, C a p o del Servizio del C o n t e n z i o s o Diplomatico, T r a t t a t i e Affari Legislativi [ H e a d of t h e D e p a r t m e n t of C o n t e n t i o u s Diplomatic Affairs, Treaties a n d Legislative Matters] a n d O s c a r Fiumara, Avvocato dello Stato, with an address for service in L u x e m b o u r g at t h e Italian Embassy,

defendant,

COMMISSION v ITALY

Facts and Issues

The facts of the case, the course of tax authorities to approve persons auth- the procedure and the conclusions, orized to sell manufactured tobacco, submissions and arguments of the parties having ensured that they meet the legal set out in the course of the written conditions which must be satisfied by procedure may be summarized as persons permitted to sell the products follows : governed by the monopoly, which bear a heavy consumer tax. The monopoly entails, in particular, special rules governing the amount and composition of the resale prices to the public of I — Summary of the facts manufactured tobacco.

1. The retail sale in Italy of products made from manufactured tobacco is Law No 825 of 13 July 1965 (Gazzetta subject to a State monopoly, which was Ufficiale No 182 of 22 July 1965), most recently set out in Law No 724 of as amended by Law No 724 of 10 December 1975 (Gazzetta Ufficiale 10 December 1975, fixes a scale of prices No 4 of 7 January 1976). The monopoly for resale to the public which is made up consists in the power conferred on the of a wide range of retail prices, each of

JUDGMENT OF 7. 6. 1983 — CASE 78/82

COMMISSION v ITALY

JUDGMENT OF 7. 6. 1983 — CASE 78/82

taking advantage of its distribution its trade promotion policy and grant to monopoly in order to create a situation the resale trader whatever remuneration of that kind. it considers most suitable, when Community exporters sell their products in Italy they are forced to pay the retailer a fixed margin, of a size dictated by the State.

As long ago as the judgment of 3 February 1976, Case 59/75 (Pubblico Ministero v Manghera [1976] ECR 91) the Court held to be discriminatory, for the purposes of Article 37, the main- tenance of an exclusive right of im- The Commission maintains that the only portation held by a State which itself reasonably sure way of eliminating the produces the goods in question, the possibility of discrimination that reason being that the monopoly cannot represents, for the purposes of Article 37 but prefer its own products to those of of the Treaty, is to eliminate the fixing competitors. Similarly, the fixing of of uniform margins. The State never- uniform trading margins by a State theless has the option of fixing a holding such a monopoly must be minimum margin, basing itself on the regarded as discriminatory because that obligation on the part of the retailer, as State cannot but fix the margins in such part of the lawful State monopoly, to a way as to favour the marketing of its negotiate with all suppliers, and on the own products. Most Italian-made manu- concern to guarantee them a minimum factured tobacco is in any case sold at remuneration. The State may further prices lower than those of products from introduce a prohibition on loss-leaders, other Member States, so that the by establishing a maximum margin the imposition of a margin fixed as a amount of which may not exceed the percentage of the retail price weighs total profit of the trader. more heavily in real costs on expensive products, which are generally imports, than on Italian products, which are usually cheaper.

the manufacturers of the imported thereon as far as monopolies falling products in their choice of commercial under Article 37 are concerned. strategy. Those disadvantages handicap However, the conditions laid down by imported products as opposed to those Article 90 (2) are not, it alleges, satisfied already established in the market, which in this particular case. are mostly domestic products. The importers are forced to grant the remun- eration fixed by their direct competitor, namely the State as holder of the production monopoly. Whilst the Italian First, the monopoly on the marketing of State, as holder of the monopolies in tobacco is not a revenue-producing both production and distribution, may monopoly. In order to be such, it is not control both the margin and the resale sufficient that the monopoly sets out to price to the public, importers may collect a tax on consumption. The control only the price. Those disad- essential purpose of the monopoly must vantages are further aggravated in an be to produce the maximum State country such as Italy, where the ban on revenue, whereas a comparison of tax all advertising relating to tobacco revenue from manufactured tobacco in primarily affects the imported product, Member States reveals that the tax less familiar than the domestic product. revenue derived from tobacco sales in Member States having no marketing monopoly is no lower as a result than that collected in Member States which do hold such a monopoly. It cannot be maintained that the fixed margin is justified as an instrument of consumer protection ensuring the transparency of the components in the final price. If such were the true basis of Next, the Commission rejects the the fixed margin, the latter would have argument that the enforcement of Article to stand as a general, permanent rule in 37 would prevent the Italian tobacco the marketing of all consumer products, monopoly from bringing in the revenue not only those subject to a monopoly. A which, it is alleged, it was specially floating margin does not, in itself, affect designed to produce, and that the the level of public resale prices, and revenue could be realized only by the therefore it cannot be claimed that the maintenance of a system of fixed fixing of uniform margins is necessary margins. It has not even been established for the purpose of avoiding an that the system of fixed margins does uncontrolled rise in prices. indeed help to produce the most revenue. In any case, the elimination of any possibility of competition at the level of trading margins is not necessary to maintain the alleged revenue-producing role of the monopoly on sales and is (c) As regards the possibility of grossly disproportionate, since the justifying a breach of Article 37 and of maximizing of revenue can never the conditions of competition by warrant such a grave distortion of the pleading Article 90 (2) of the Treaty, as fundamental provisions of the Treaty. did the Italian Government in its reply to That a system of fixed margins in no the reasoned opinion, the Commission way constitutes an indispensable compo- does not a prion rule out reliance nent of a revenue-producing monopoly is

(a) The economic and legal reasons for the price system are related to the The State does not fix the margin on the characteristics of the monopoly, which basis of its sales policy for its own was adjusted for the purposes of Article products, but applies the same provisions 37 of the Treaty. In Italy, in the case of throughout for all sales of articles subject manufactured tobacco, the monopoly has to the monopoly, guaranteeing to all been specially designed to produce the domestic and foreign traders the greatest maximum revenue for the State, over freedom in selecting prices. The margin and above the possibilities offered by the of 8% constitutes a fair and adequate normal system of taxing the consumption remuneration for the retailer's role. or the manufacture of certain goods. The resale trader acts as a veritable tax- collector. The system of fixed margins avoids the progressive elimination of Since the margin is fixed as a percentage "marginal" producers which would of the final selling price, the resale trader create a de facto monopoly on the collects a higher margin in absolute market, causing an increase in illegal terms on the sale of imported products, consumption and therefore considerable with the result that the latter enjoy an losses to the exchequer. advantage. Thus, on the sale of a packet of 20 home-produced cigarettes of the most widely sold brand, the· retailer collects a remuneration of LIT 72, The fact that the margin is fixed also whereas he collects LIT 120 on the sale serves to protect the consumer by of 20 cigarettes of the most widely sold ensuring the transparency of the differ- foreign brand. Moreover, to assert that ent components of the final price of a imported products are more heavily

taxed is illogical in view of the fact that Foreign products are marketed in larger the action was brought by the quantities in fact than domestic products. Commission because the uniform margin Their retail sales are, in absolute terms, constituted an insuperable upper limit. better remunerated than those of domestic products. Their distribution is facilitated by extensive advertising, from which domestic brands do not benefit, because the ban on advertising is in The principle of non-discrimination practice openly disregarded in the case prohibits Member States from adopting of foreign brands. At present, 263 in their territories measures which treat foreign products and 66 domestic products placed in analogous situations products are marketed in Italy, differently. It permits differences in treatment between products marketed inside the country and those marketed abroad which are attributable to the Furthermore, not every measure disparity of the laws of the various affecting competition constitutes ipso Member States. The principle of non- facte a forbidden infringement. Member discrimination prohibits placing an States are empowered to regulate imported product at a disadvantage as commerce and, in particular, to intervene compared with the domestic product. In to control prices at the retail stage, the absence of a common organization provided that the common organization of the market the Member State may of that sector of the market is not adopt special provisions for the domestic thereby endangered. Even where there is market which do not lead to discrimi- a common organization of the market, nation between domestic and imported the Court has accepted in its case-law products but which differ from the price-control at the retail stage and provisions applicable in other States. action taken to control retailers' trading margins if it is designed to safeguard, besides the interests of the final consumer, the fiscal and economic interests of the State. Such a power (c) Alleged distortions .of competition would, a fortiori, encounter no serious may be examined in the context of objection as regards products which are Article 37 of the Treaty solely to not subject to a common organization of determine the possible existence of the market. discrimination. Since no discrimination has been established, the action must ipso facto be dismissed without any exam- ination of the arguments relating to In Article 2 (3) (c) of Commission competition. Directive 70/50/EEC of 22 December 1969 based on the provisions of Article 33 (7), on the abolition of measures which have an effect equivalent to quantitative restrictions on imports and In any case, there is no restriction on are not covered by other provisions competition because the system in force adopted in pursuance of the EEC Treaty enables the importer to offer the product (Official Journal, English Special Edition for sale at a more competitive price 1970 (I), p. 17), the Commission itself without interfering with the resale listed among the illegal measures only trader's percentage margin, thereby those which fix profit margins or any stimulating sales. other component of the price of

The development of trade within the There is no doubt that the tobacco Community is, the defendant contends, monopoly in Italy is of a revenue- in no way compromised by fixing the producing character. It is sufficient, in margin assigned to the retailer of the that connection, to have regard to the products within the monopoly. The extremely large share of the tax element measure in question is entirely neutral as in the final price of the product, regards competition between imported amounting to about three-quarters and domestic products. No producer, thereof, and to the position of the whether domestic or foreign, can offer retailers, who function as tax-collectors. marketing premiums or incentive bonuses The monopoly was introduced for the to retailers. During the last 20 years, and purpose of obtaining tax revenue for the since the abolition by law of all tobacco State, although there were other, and advertising, the range of products on the different, aims besides that. The State's market — domestic and foreign alike — fiscal policy is not always to gather the has changed considerably, and foreign maximum possible in tax receipts, and products have greatly increased their from a Community standpoint revenue- share in the Italian consumer market, producing monopolies afford one of the moving up from 2.47% in 1962 to instruments for implementing the fiscal 37.30% in 1981. At all events, it is quite policies of Member States. A modern out of the question in the circumstances revenue-producing monopoly is an to speak of Community trade as having ensemble of measures serving a number been affected "to such an extent as of purposes which are closely inter- would be contrary to the interests of the related. It is therefore impossible to Community". subscribe to the thesis that undertakings having the character of a revenue- producing monopoly are exclusively those whose sole purpose is to obtain for The question as to whether France has the State the maximum of tax receipts in given up the revenue-producing side of absolute terms. its monopoly on tobacco or has at least ceased to fix trading margins for manu- factured tobacco is irrelevant to the Italian position on that point. As for the The fixing of the margin contributes Italian monopoly on the retail sale of decisively to ensuring that the public matches, the Commission is wrong in resale prices of products within the maintaining that Article 2 of the revenue-producing monopoly are Ministerial Decree of 25 June 1973 transparent and verifiable. It prevents relaxed the margin. The decree relaxed competition in margins, the effect of only the margin on the distribution and

3 That scale of charges comprises a wide range of retail prices, each of which is made up of three parts, namely the remuneration of the manufacturer and the wholesale distributor, the share taken by the exchequer and the margin taken by the retailer. That margin amounts to 8 % of the public resale price. The authorities administering the monopoly in their capacity as manu- facturer, and the importers, are free to choose for each of their products one

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of the public resale prices shown in the scale, or even a price not shown which is then incorporated into it.

4 On 13 November 1980, pursuant to the first paragraph of Article 169 of the EEC Treaty, the Commission delivered to the Republic of Italy a reasoned opinion in which it claimed that the latter had failed to fulfil its obligation to adjust its monpoly on sales of manufactured tobacco products to comply with Article 37 of the Treaty, namely by maintaining certain procedures under that monopoly. Amongst the contested procedures, the fixing of uniform trading margins was cited. Further to that reasoned opinion, the Italian Government and the Commission agreed on a series of adjustments to the monopoly. However, the Italian Government refused to abandon the system of uniform margins for retail sales.

5 The Commission thereupon brought the present proceedings, the scope of which is limited to the single question concerning the maintenance of such uniform trading margins, seeking a declaration that the system is contrary to Article 37 of the Treaty.

6 Article 37 (1) of the Treaty provides that "Member·States shall progressively adjust any State monopolies of a commercial character so as to ensure that when the transitional period has ended no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States".

10 The Italian Government further argues that alleged distortions of competition do not fall to be examined in the light of Article 37 of the Treaty. It also denies the existence of a restriction on competition and emphasizes that the measure in dispute constitutes, in substance, an intervention in the shaping of retail prices which is accepted in the case-law of the Court. In the alternative, the Italian Government argues that Article 90 (2) of the Treaty permits a derogation from the Treaty provisions because the Italian monopoly on the retail trade in manufactured tobacco has the character of a revenue-producing monopoly and because the abolition of the uniform trading margins would obstruct the particular aims of the monopoly. The margin's invariability ensures the transparency of prices, precludes a price-cutting war and helps to restrict smuggling.

n In the first place it should be recalled, as the Court has held, in particular, in its judgments of 3 February 1976 (Case 59/75 Pubblico ministero v Mangbera [1976] ECR 91) and of 13 March 1979 (Case 91/78 Flansenv Hauptzollamt Flensburg [1979] ECR 935), that Article 37 of the Treaty does not demand the total abolition of national monopolies having a commercial character but requires them to be adjusted in such a way as to ensure that no discrimi- nation regarding the conditions under which goods are procured and marketed exists between nationals of Member States. It is clear not only from the wording of Article 37 but also from its position in the general

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u That objection, however, cannot be accepted. The impossibility of granting marketing premiums exists as much for the Italian tobacco-producing monopoly as for foreign producers. Moreover, the Commission has not demonstrated that granting marketing premiums constitutes the only commercial tactic which would enable foreign products to establish themselves on the market, especially as competition in retail prices remains possible. The figures submitted by the Commission on the development of tobacco imports into Italy and the market share of imported products there as compared with other Member States, as well as the figures submitted by the Italian Government which the Commission has not challenged even though it has disputed their interpretation, do not in any case support the thesis that imported products, unlike domestic ones, cannot compete effectively on the market except by means of marketing premiums for retailers.

COMMISSION v ITALY

is It should further be stressed that the trading margin fixed by law has for years remained unchanged at 8 °/o of the retail price. No power of decision and no margin of discretion in the matter are conferred on the authorities, who play no rôle in fixing the trading margin. There is nothing to support the claim that the margin takes account of special needs of products subject to the Italian monopoly in the light of the market situation. The Commission has thus failed to establish in what way the fixing of the margin could, in such circumstances, favour the marketing of domestic products alone.

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is Admittedly, the provisions in dispute have the effect of committing foreign producers to the observance of a uniform trading margin on the Italian market whereas there is no analogous obligation on foreign markets in respect of products from the Italian monopoly. That situation, however, does not amount to discrimination within the meaning of Article 37 of the Treaty. It is merely the consequence of the existence of a monopoly having a commercial character and entailing the regulation of trading margins, whereas no such monopoly and no such regulation exist in other Member States. If the disparities between national laws on trading margins for the retail trade in tobacco products were to have adverse effects on competition in the common market, it would be the duty of the competent Community institutions to eliminate such effects by harmonizing the provisions laid down in Member States by law, regulation or administrative action.

i9 It is clear from the foregoing that the Commission has failed to demonstrate that the provisions in dispute constitute discrimination in respect of imported products and prejudice the free movement of goods under normal conditions of competition. The application must therefore be dismissed as unfounded.

Costs

20 Under Article 69 (2) of the Rules of Procedure the unsuccessful party shall be ordered to pay the costs if they have been asked for in the successful party's pleading. Since the Commission has failed in its arguments, it should be ordered to pay the costs.

On those grounds,

Delivered in open court in L u x e m b o u r g on 7 J u n e 1983.

P. H e i m J. Mertens de Wilmars Registrar President

O P I N I O N OF MRS ADVOCATE GENERAL ROZÈS D E L I V E R E D O N 26 A P R I L 1983 '

Mr President, comparable to those of a domestic mar- Members of the Court, ket, as laid down by Article 3 of the Treaty. !

This Court has before it an action brought by the Commission under The campaign deals in the first place Article 169 of the EEC Treaty for a dec- with taxation, in view of the major share laration that by maintaining a system of taken by taxes in the retail price of fixed margins in the marketing of manu- tobacco (70 % on average in the case of factured tobacco the Italian Republic has cigarettes 3 ). On 19 December 1972 the failed to fulfil its obligations under Council adopted its first directive on Article 37 of that Treaty. the harmonization of excise duties on cigarettes (Directive 72/464/EEC), I — In order to appreciate what is at which was subsequently amended several stake in this action, it is necessary to place times. In essence, the directive seeks the it in its context. The case forms part of a progressive elimination from taxation on campaign conducted by the Community the consumption of tobacco in the institutions — in particular by the Member States of the factors likely to Commission — for the purpose of 2 — Subparagraphs (a) and (f). creating in the sector of manufactured 3 — Report by Mr Boukc Bcumcr to the European Par- tobacco products an economic union liament of 3. 11. 1982, Document 1-789/82, para. 9; judgment of the Court of Justice of 29. 10. 1980 in with healthy competition and features Van Laudcxvyck v Commission (tlie so-called Fcdctab case), Joined Cases 209 to 215 and 218/78, [1980] I — Translated from the French. ECR 3125, para. 121 at p. 3260.