C-3/97

JUDGMENT OF 28. 5. 1998 — CASE C-3/97

JUDGMENT OF THE COURT (First Chamber) 28 May 1998 *

In Case C-3/97,

REFERENCE to the Court under Article 177 of the EC Treaty by the Court of Appeal (England and Wales) Criminal Division for a preliminary ruling in the criminal proceedings before that court against

John Charles Goodwin,

Edward Thomas Unstead,

GOODWIN AND UNSTEAD

after considering the written observations submitted on behalf of:

— Mr Goodwin and Mr Unstead, by Alan Newman QC and Peter Guest, Bar­ rister, instructed by Audrey Oxford, Solicitor, acting for Mr Unstead,

— the United Kingdom Government, by John E. Collins, Assistant Treasury Solicitor, acting as Agent, with Stephen Richards and Mark Hoskins, Barris­ ters,

— the Greek Government, by Fokion Georgakopoulos, Legal Adviser to the State Legal Service, acting as Agent, and Anna Rokofyllou, Adviser to the Deputy Minister for Foreign Affairs, acting as Agents,

— the Commission of the European Communities, by Hélène Michard and Barry Doherty, of its Legal Service, acting as Agents,

Judgment

1 By judgment of 24 December 1996, received at the Court on 9 January 1997, the Court of Appeal (England and Wales) Criminal Division referred to the Court for a preliminary ruling under Article 177 of the EC Treaty a question on the inter­ pretation of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmoni­ sation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1; here­ inafter 'the Sixth Directive').

2 That question was raised in criminal proceedings against Mr Goodwin and Mr Unstead, who were charged with the fraudulent evasion of VAT in respect of sales of counterfeit perfume products.

3 According to the documents before the Court, Mr Goodwin was accused of hav­ ing purchased counterfeit perfume products and of having sold them without being registered for VAT. Mr Unstead was accused of having participated in the manufacture, production, distribution and sale of counterfeit perfume products through a business organisation which he ran together with other persons, and which was not registered for VAT.

4 At first instance, the case came before the Inner London Crown Court, which held that the Sixth Directive did not preclude the charging of VAT on the manufacture, production, distribution and sale of counterfeit perfume products, and found both defendants guilty of conduct contrary to section 72(1) and (8) of the Value Added Tax Act 1994.

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'The following shall be subject to value added tax:

1. The supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

2. The importation of goods.'

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JUDGMENT OF 28. 5. 1998 — CASE C-3/97

9 It should be borne in mind at the outset that, according to established case-law, the Sixth Directive, whose purpose is to achieve widespread harmonisation in the area of VAT, is based on the principle of fiscal neutrality. As regards the levying of VAT, that principle precludes a generalised differentiation between lawful and unlawful transactions, except where, because of the special characteristics of certain products, all competition between a lawful economic sector and an unlawful sector is precluded (see inter aim Case C-111/92 Lange v Finanzamt Fürstenfeldbruck [1993] ECR I-4677, paragraph 16).

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GOODWIN AND UNSTEAD

provisions of the Sixth Directive (Einberger, paragraphs 19 and 20; Mol, paragraph 15; Happy Family, paragraph 17; and Witzemann, paragraph 19). That line of case- law thus concerns goods which, because of their special characteristics, may not be placed on the market or incorporated into economic channels.

13 However, that is not the position here. As the Greek Government, the United Kingdom Government and the Commission emphasised, the goods at issue in the main proceedings are not goods which cannot be placed on the market because of their intrinsic nature or special characteristics.

1 4 As the Advocate General pointed out in point 22 of his Opinion, although transac­ tions involving counterfeit products infringe intellectual property rights, any con­ sequential prohibition is not linked to the nature or essential characteristics of such products, but to their detrimental impact on the rights of third parties. Similarly, as the Commission noted in its observations, the prohibition on counterfeit products, which stems from the fact that they infringe intellectual property rights, is condi­ tional, not absolute as in the case of narcotics or counterfeit currency. That prohi­ bition is not sufficient, therefore, to place trade in such products outside the scope of the Sixth Directive.

15 Furthermore — as the Commission also pointed out — the possibility of compe­ tition between counterfeit products and goods which are lawfully traded cannot be ruled out in a case such as that before the national court, in so far as there is a law­ ful market in perfume products on which counterfeit goods have a specific impact. Accordingly, such goods cannot, like narcotics or counterfeit currency, be regarded as extra commercium.

THE COURT (First Chamber),

in answer to the question referred to it by the Court of Appeal (England and Wales) Criminal Division by judgment of 24 December 1996, hereby rules:

On a proper construction of Article 2 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, VAT is payable on the supply of counterfeit perfumes.

Wathelet Edward Jann

Delivered in open court in Luxembourg on 28 May 1998.

R. Grass M. Wathelet