C-28/89

GERMANY v COMMISSION

OPINION OF MR ADVOCATE GENERAL JACOBS delivered on 20 November 1990 *

My Lords, advance payment of export refunds (disallowance of DM 190 429.76).

1. In these proceedings, the Federal Controls on denaturing of skimmed-milk Republic of Germany ('Germany') seeks the powder partial annulment of Commission Decision 88/630/EEC (Official Journal 1988 L 353, p. 30) on the clearance of the accounts presented by Germany in respect of the expenditure for 1986 of the European Agri­ cultural Guidance and Guarantee Fund ('EAGGF') to the extent that the 2. The first head of the action illustrates Commission disallowed certain expenditure one of the more grotesque consequences of incurred by Germany. The action is the Community's milk surplus: the adul­ concerned with four distinct areas: teration of skimmed-milk powder with substances such as ferrous sulphate and copper sulphate. With a view to reducing intervention stocks of skimmed-milk powder, Commission Regulation (EEC) No 368/77 (Official Journal 1977 L 52, p. 19) initiated a scheme for the sale by controls on denaturing of skimmed-milk tender of skimmed-milk powder for use in powder (disallowance of DM 61 377 605.77) ; feed for pigs and poultry. In order to ensure that the skimmed-milk powder could not be diverted to the more lucrative calf-feeding market, prospective tenderers were required to give an undertaking to denature the skimmed-milk powder, or have it denatured, either in accordance with one of controls on butter quality during trial the formulae set out in section 1 and with storage period (disallowance of the prescriptions set out in Section 3 of the DM 1 947 053); Annex to the regulation, or by direct incor­ poration into a feedingstuff (Article 6(1)). Section 1 of the Annex to Regulation No 368/77, as amended in particular by Commission Regulation No 2923/82 (Official Journal 1982 L 304, p. 64), sets out the different denaturing formulae. delayed takeover of intervention butter Paragraph D of Section 3 of the Annex, (disallowance of DM 1 789 856.23); which lays down general prescriptions

'The products added to skimmed-milk powder, when the formulae in Section 1 are used, must be distributed in a uniform manner so that when two 50 g samples, drawn at random from a 25 kg batch are 6. These arguments have, however, already chemically analysed the results are the same been rejected in Joined Cases 258/87, for both samples within the tolerable error 337/87 and 338/87 Italy v Commission limits of the analysis method used. ... ' [1989] ECR 3359 where, at paragraph 18 of the judgment, the Court ruled that the technical requirements at paragraph D of section 3 of the Annex form an integral part of the system of control of denaturing established by Regulation No 368/77 and 3. Under Article 16(2) of Regulation that those requirements themselves indicate No 368/77, the competent authority of the the systematic nature of the chemical Member State concerned is responsible for analysis. checking that denaturing or direct incor­ poration has been properly carried out, and to that end it is required both to verify accounts and to provide for on-the-spot supervision. 7. In the light of that judgment, Germany was asked in a written question from the Court whether it wished to pursue this part of the action. It replied in the affirmative, 4. The dispute is concerned with the nature citing certain other arguments which had of the tests required to ensure that the dena­ not been raised or considered in the earlier turing substance is distributed in the case: skimmed-milk powder in a uniform manner. Prior to 21 September 1987, Germany relied on inspections during the denaturing process and on subsequent organoleptic tests in order to check the homogeneity of the denatured product, but did not carry out a First, that in view of the particular dena­ chemical analysis. The Commission, turing formula used in Germany (Formula however, insists that a chemical analysis is IK) a chemical analysis is an inadequate required in accordance with Section 3 D of means of checking the homogeneity of the the Annex to Regulation No 368/77. denatured product. This is because the chemical analysis will only indicate indi­ rectly whether the colza meal — the decisive denaturing substance used under that formula — has been distributed uniformly. 5. The primary arguments advanced by On the other hand, the combination of Germany against the disallowance are that checks during mixing and organoleptic Regulation No 368/77 contains no specific testing is adequate for that purpose.

9. As regards the second argument, as the Thirdly, no account is taken of the fact that, Commission points out, while Directive after 21 September 1987, Germany did 70/524 excludes the use in feedingstuffs of carry out a chemical analysis on retained ferrous sulphate or copper sulphate in samples of skimmed-milk powder which had monohydrate form, it does not prohibit the been denatured in 1986. Since the legislation use of ferrous sulphate heptahydrate or is silent as to the timing and frequency of copper sulphate pentahydrate, which are the chemical analyses, and since those tests relevant substances referred to in certain of showed that the denaturing substances had the denaturing formulae (including Formula been uniformly distributed, it is contrary to IK) set out in section 1 of the Annex to the principle of proportionality to require Regulation No 368/77. Germany to bear the entire burden of the amount disallowed.

11. Reliance on the principle of propor­ amended in particular by Commission tionality is in my view inappropriate in the Regulation (EEC) No 1829/80 (Official context of this case. The Court has consis­ Journal 1980 L 178, p. 22) and tently held, inter alia in Case 238/86 The Commission Regulation (EEC) No 1836/86 Netherlands v Commission [1988] (Official Journal 1986 L 158, p. 57). ECR 1191, at paragraphs 25 and 26 of the Under Articles 2 and 3 of Regulation judgment, that Articles 2 and 3 of Regu­ No 685/69, intervention agencies are to lation No 729/70 on the financing of the buy in butter only if it satisfies certain common agricultural policy (Official requirements, including conditions as to Journal, English Special Edition 1970 (I), good keeping quality. To that end, Article p. 218) permit the Commission to charge to 6(1) (as amended by Regulation the EAGGF only sums paid in accordance No 1836/86) provides that prior to with the relevant Community rules, leaving definitive purchase the butter must first be the Member States to bear the burden of kept for a storage test period of two months any other sum paid. Where those rules starting from the date of entry of the butter authorize payment of aid only on condition into the cold storage depot. Under Article that certain formalities relating to proof or 6(2) (as amended by Regulation supervision are observed, aid paid in No 1829/80), the seller by his offer disregard of that condition is not in undertakes that 'where, during the storage accordance with Community law so that the test period, the deterioration in the quality expenditure incurred may not be charged to of the butter proves greater than that which the EAGGF, even if it were established that normally results from storing butter no substantive irregularity has been satisfying the requirements referred to in committed. Moreover, the third and fourth Article 2', he will take back the butter, recitals of Regulation No 368/77 make it reimburse any buying-in price already paid plain that strict observance of the and pay the storage costs from the day of requirement that the skimmed-milk powder takeover to the date of removal from will not be diverted from its intended final storage. use is one of the principal objectives of the regulation.

quality and that the methods of analysis 819/79 Germany v Commission, cited above, used by the competent intervention agency that where Community legislation prescribes are such that it is in fact possible to a particular system of supervision, the need determine with certainty after only two for a uniform application of Community weeks of storage whether the butter is going regulations requires that Member States to deteriorate to an abnormal extent during must comply with that system, so that it is the trial storage period. Germany also not necessary to consider whether an alter­ points out that application of the native system might be more effective. The Commission's strict view would lead to same conclusion must apply where it is considerable practical difficulties: from the merely claimed that an alternative system is administrative point of view, it would be equally effective to the one prescribed. very difficult to organize all testing exactly on the sixtieth day of storage, while the results of tests carried out after that date could be open to challenge by the affected traders Finally, Germany argues that the Commission has failed to give adequate reasons for disallowing what amounts to % 0.25 of the relevant expenditure. 18. The practical difficulties arising from this strict view can in my opinion be met by carrying out the tests as promptly as possible at the end of the trial period. It appears improbable that where tests are carried out within, at the latest, a few days of the expiry of the trial period, a trader would be able convincingly to argue that 16 In mv view, these arguments must be any abnormal deterioration discovered by rejected As I have already stated in my the tests had not taken place during that Opinion in Case C-22/89, delivered on period. 7 November 1990 [1990] ECR I-4805, the wording of Article 6(1) of Regulation No 685/69, which refers to a storage trial period of two months, itself indicates that the testing for quality deterioration cannot take place before the sixtieth day. This strict interpretation is supported by the objective of the trial period and of the quality tests, 19. As regards the final argument, the which is to provide a guarantee of keeping Court has consistently accepted that, as quality before the butter is definitively taken regards the requirement of reasoning for into intervention storage. decisions disallowing expenditure, it is permissible to refer to the reasons for disallowance given in the Commission's Summary Report for the clearance of the EAGGF accounts for the years in question, which is communicated to the Member States (see, for example, Case 238/86 17. The fact that testing at an earlier date Netherlands v Commission, cited above, might provide an equivalent guarantee is in paragraphs 15 and 16 of the judgment). my view irrelevant. As already mentioned in From the Summary Report for 1986 (Doc. relation to the first head of claim, the Court VI/160/88 — FR , pp. 54 and 55), it has consistently ruled, notably in Case appears that five Member States, including

Germany, suffered a disallowance of 0.25% Delayed takeover of intervention butter of relevant expenditure in respect of the quantities of butter examined before the sixtieth day, and that the Commission reached this percentage on the basis of two 22. The third head of the application, like considerations. First, the quality controls on the second, concerns the storage of inter­ production carried out were, on the whole, vention butter. Detailed rules of application adequate. Secondly, the results of the tests for intervention on the market in butter and for keeping quality carried out in the cream are laid down in Commission Regu­ Member States which did observe the lation (EEC) No 685/69 (Official correct procedures indicated that only a Journal, English Special Edition 1969 (I), small proportion of the total quantities p. 194), failed to meet the necessary standard. The Commission indicates in its Defence to these proceedings that that proportion was, on average, about 0.25% of the quantities of butter tested. 23. Prior to 1986, the date of takeover of butter by the intervention agency, i. e. the date on which the agency assumes responsi­ bility for storage costs, insurance etc., in principle coincided with the day on which the butter entered the refrigerated storage depot designated by the intervention agency. In February 1986, following the 20. It was plainly not possible for the announcement of its proposal to lower the Commission to determine after the event intervention price for butter in the 1986/87 which quantities of butter tested before the milk year, the Commission introduced a sixtieth day would not have been passed as system of delayed takeover in order to satisfactory if the correct procedures had prevent a surge of speculative sales into been followed. It was therefore not unrea­ intervention. Under that system, sellers were sonable for it to assume that the quantity required to bear the costs of intervention for which would have been rejected under the periods of varying duration calculated from correct procedures would have corre­ the date of entry of the butter into storage. sponded to the Community average. Indeed, In summary, the position during 1986 was since the alternative approach would have as follows: been to disallow the total amount of relevant expenditure, the Commission's approach must even be seen as generous to the Member States concerned. I therefore — before 28 February 1986: no provision consider that the reasons given for the adoption of the percentage must be for delayed takeover; regarded as adequate.

25. Germany does not deny that the above events took place. It argues against the — 12 September 1986 to 31 December disallowance essentially on four grounds. 1986: delayed takeover period of 120 First, that under German law, and generally days (Commission Regulation (EEC) under the laws of the Member States, an No 2814/86, Official Journal 1986 offer to sell is not regarded as binding: the L 260, p. 14, and Commission Regu­ BALM thus had no legal ground to refuse lation (EEC) No 3293/86, Official to allow sellers to withdraw and represent Journal 1986 L 304, p. 24). their offers. Secondly, that it was not possible for practical reasons to change the established procedures at short notice. Thirdly, the Commission had, in a letter to the German Minister for Agriculture of 24. The Commission alleges that the 24 May 1982 (annexed to the Application), Bundesanstalt für Landwirtschaftliche specifically permitted the submission of Marktordnung ('the BALM'), the German offers to sell butter which had not yet been intervention agency, permitted sellers to produced and had not taken any steps to manipulate the dates of their offers to sell withdraw that permission. That letter and of delivery into intervention in such a moreover confirmed the non-binding way as to avoid the application of delayed character of offers by specifying that sellers takeover periods, and in particular to must be permitted to withdraw their offers exploit the fact that there was no delayed if the possibility of sale on the open market takeover period between 12 May 1986 and presented itself. Finally and more generally, 12 June 1986. According to the Germany argues that if there were lacunae Commission, the BALM allowed sellers to in the Community legislation which sellers withdraw offers to sell made up to 11 May could exploit, it was for the Commission to 1986, when a 60-day delayed takeover take the necessary steps. period applied, and to re-present the offers after that date. In addition during the period 12 May 1986 to 12 June 1986, the BALM permitted sellers to submit offers relating to the whole of their next month's butter production instead of the next week's 26. In summary, the Commission's view is production, which had been the practice to that the introduction in February 1986 of date: the sellers were thus able to withdraw delayed takeover periods produced a new a large proportion of their future economic and legal situation which required production from the effects of the delayed the German authorities of their own motion

to alter their practices so as to treat offers as 29. As regards Germany's second argument, binding and not to accept offers for butter I am not convinced that it was impossible to which had not yet been produced. react swiftly to the new situation. The 60-day delayed takeover period laid down in Regulation No 521/86 ceased to have effect at the end of the 1985/86 milk year, i.e. 12 May 1986, and it should then have immediately been apparent to the inter­ vention agency (as it plainly was to the sellers) that a loophole had arisen in the legislation which could be exploited if 27. In my opinion, the arguments of the preventative action were not taken. It was German Government must be rejected. As not necessary to establish a complicated new regards the first argument, as the set of procedures: it sufficed merely to Commission points out, the Community inform any seller who sought to withdraw system of intervention contains its own his offer on or after 12 May 1986 that the specific rules which may diverge from offer was to be treated as binding, or alter­ normal contractual principles. That the natively, that if the offer was withdrawn, it system is a specific one is illustrated by the could not be re-presented at a later date. fact that an intervention agency, as recipient of an offer to sell, does not enjoy the freedom to accept or reject an offer which it would in principle have in the ordinary contractual situation: on the contrary, once the conditions of intervention are fulfilled, it is obliged to accept an offer to sell into intervention (see, for example, Case 49/71 Hagen [1972] ECR 23, at paragraph 10 of the judgment). If the contractual freedom of the intervention agency can be so constrained by Community rules, then, in my view, the freedom of the offeror to 30. I am also of the view that, with the withdraw his offer before acceptance can introduction of the system of delayed also be restricted where this is necessary to takeover, the German authorities should achieve the objectives of the legislation. have ended, or at any rate suspended, the practice of accepting offers for butter which had not yet been produced. It must have been clear to the intervention agency in May-June 1986, when sellers began to offer to sell a whole month's, instead of a week's, future production, that the purpose of the device was to circumvent the delayed takeover period. As the Commission points 28. It is in my view plain that such a out, the permission granted in 1982 restriction was necessary in the circum­ (apparently only to Germany) to purchase stances which gave rise to the introduction butter which had not yet been produced was of the system of delayed takeover, since made in a completely different situation in otherwise that system could be easily which the practice did not result in an circumvented by the simple device of with­ increased burden on the EAGGF and did drawing the offer and representing it at a not conflict with the rules of the inter­ more favourable time. vention system.

31. In my view, it is also necessary to reject of export refunds in respect of agricultural the final argument, to the effect that it was products (Official Journal 1980 L 62, p. 5) for the Commission, which had permitted a provides that an amount equal to the export lacuna to arise in its legislation, to take refund shall, at the request of the party steps to prevent circumvention of the concerned, be paid as soon as the products system. or goods have been brought under the customs warehousing or free zone procedure with a view to their being exported within a set time-limit. Under the first paragraph of Article 6 of the same 32. The Court has consistently held that it regulation, the benefit of the advance is for the Member States, by virtue of payment arrangements is subject to the Article 5 of the Treaty, to ensure that lodgment of a security guaranteeing reim­ Community regulations, particularly those bursement of an amount equal to the sum concerning the common agricultural policy, paid, plus an additional amount. Under the are implemented within their territory (see second paragraph of Article 6, the security Joined Cases 205/82-215/82 Deutsche is to be forfeited wholly or in part inter alia Milchkontor [1983] ECR 2633, at paragraph if there proves to be no right to the export 17). Moreover, Article 8(1) of Regulation refund or a right to a smaller refund. No 729/70 provides that Member States must take the measures necessary to prevent and deal with irregularities affecting the operations of the EAGGF. The purpose of the new system of delayed takeover, namely the prevention of speculative selling, was made abundantly clear, in particular in the recitals to Regulation No 521/86. In those circumstances, it was incumbent on Member 35. Commission Regulation (EEC) States, of their own motion, to make any No 798/80 lays down detailed rules for the adaptation to their administrative rules or arrangements introduced by Regulation practices which was necessary to ensure that No 565/80 (Official Journal 1980 L 87, the objectives of the system were met. p. 42). Article 2(1) provides that admission under the advance payment arrangements shall be subject to the lodging with the customs authorities of a payment declaration under which the exporter states 33. I would therefore reject the third head his intention to place the products or goods of the action. under customs control, to expon them and to qualify for a refund. Article 3(1) provides that at the time of acceptance of the payment declaration, the products or goods shall be placed under customs control. Under Article 4(2), the examination of the Advance payment of export refunds payment declaration and of the products or goods themselves shall be used for deter­ mining the refund. Detailed provision is also made for securities. Article 7(1) requires that, prior to acceptance of the payment 34. Article 5(1) of Council Regulation declaration, a security is to be furnished (EEC) No 565/80 on the advance payment equal to the amount to be paid in advance

38. In contesting the disallowance, Germany first points out that under Article 36. In 1984 an unnamed German company 8(1) of Council Regulation (EEC) presented to the German customs auth­ No 729/70 on the financing of the common orities a payment declaration indicating its agricultural policy sums lost through irregu­ intention to export 783 531.2 kg of wheat larities or negligence are to be recovered in starch and requested that the goods be accordance with the laws, regulations and placed under customs control and that the administrative provisions of the Member export refunds be paid in advance. The States. The delay in the recovery of the customs authorities (for reasons which are advance payment was not the result of not clear) did not carry out an inspection of negligence but was caused by the adminis­ the goods, but authorized an advance trative appeal and by the fact that the payment of DM 59 985.28 to the company. customs authorities had a large backlog of At the same time, the customs authorities similar cases. In the circumstances, the charged to an overall guarantee lodged by Commission should have awaited the the company DM 190 427.76, representing outcome of the administrative appeal and the amount of the advance payment and a was not entitled to disallow the amount of supplement of DM 130 442.48, calculated the advance payment in the clearance of in accordance with Article 7(1) of Regu­ accounts for 1986. lation No 798/80, to be held as a security. Subsequently, the customs authorities discovered that only 167 766 kg of the total quantity declared by the company had in fact been produced but had not been packaged for export, and that the remaining 39. As regards the security, Germany quantity had not even been produced. The argues that Community law did not customs authorities therefore adopted a prescribe what should be done when a decision requiring repayment of the amount payment declaration was presented in advanced and declaring forfeit the security respect of (largely) non-existent goods. of DM 130 442.48. The company lodged an National law therefore applied, and under administrative appeal and obtained a stay of German customs law the fact that the goods execution of the decision. The matter was were not in existence at the material time not resolved until October 1988 when the invalidated and nullified the payment company repaid, with interest, the amount declaration so that there was no legal basis of the advance payment, and the customs for declaring the security forfeit. To accept authorities released the security. that the payment declaration, although

42. As regards the security, I accept that genuine doubts as to the legality of the 40. In my opinion, these arguments cannot forfeiture excuse an element of delay in succeed. Article 8(1) of Regulation reaching a final decision. However, I cannot No 729/70 imposes on Member States an accept that the final decision of the German obligation to 'take the measures necessary' authorities to release the security was the to prevent and deal with irregularities and correct one. The relevant Community rules, to recover sums lost as a result of irregu­ namely the second paragraph of Article 6 of larities or negligence. As the Court Regulation No 565/80 and Article 10(l)(b) indicated in its recent judgment of 11 of Regulation No 798/80, make it clear October 1990 in Case C-34/89 Italy v that where, as in this case, there is no entit­ Commission [1990] ECR 1-3603, at lement to the refund, the security is to be paragraph 12 of the judgment), the first two forfeited in full. There was therefore no paragraphs of Article 8 of Regulation room for application of national customs No 729/70 are an expression, as regards law. Moreover, as the Commission points the financing of the common agricultural out, the purpose of the payment declaration policy, of the general obligation of diligence and of the requirement that a security be laid down in Article 5 of the Treaty, an lodged is to guarantee the performance by obligation which implies that Member States the exporter of his obligation to export. The must act promptly to prevent and deal with application of a national rule entailing the irregularities. nullity of the declaration in cases where the goods had not been produced would deprive the security of its function in that an exporter could, without any risk to himself, make false declarations as to the existence of the goods and his intention to export 41. It is in my view plain that the German them. authorities were excessively slow in seeking recovery of the advance payment. The amount was reimbursable as soon as it became apparent, in November 1984, that the payment declaration submitted by the company was incorrect. Of course the company could not be prevented from exer­ 43. As regards the question of reasoning, cising its right to an administrative appeal, the eighth recital to the contested but once the issue had been reviewed under Commission decision records that the the appeal procedure and it had been found, expenditure disallowed for Germany in March 1986, that there were no grounds includes an amount of DM 130 442.48 in

(2) Order the Federal Republic of Germany to bear the costs.

I-608