JUDGMENT OF 27. 2. 1980 — CASE 169/78 COMMISSION v ITALY

In Case 169/78

THE COURT composed of: H. Kutscher, President, A. O'Keeffe and A. Touffait (Presidents of Chambers), J. Mertens de Wilmars, P. Pescatore, Lord Mackenzie Stuart, G. Bosco, T. Koopmans and O. Due, Judges, Advocate General: G. Reischl Registrar: A. Van Houtte

gives the following

JUDGMENT

Facts and Issues

The facts, procedure, conclusions and submissions and arguments of the parties may be summarized as follows:

I — Summary of the facts

Italian production of spirits, in other words spirituous beverages obtained by distillation, coming within tariff subheading 22.09 C of the Common Customs Tariff, is of the order of 400000 hectolitres per annum. It consists essentially of spirits obtained from wine and marc, particularly brandy and grappa. The Italian production of spirits obtained from other fruit is quite small, of the order of 24000 hectolitres per annum, and the production of spirits obtained from cereals even smaller.

In Italy an excise duty is levied on alcoholic beverages intended for the retail trade in the form of tax banderoles attached to bottles containing up to 2 litres.

Article 6 of Decree Law No 745 of 26 October 1970 on special measures for stimulation of the economy (Gazzetta Ufficiale della Repubblica Italiana [Official Journal of the Italian Republic] No 272 of 26 October 1970, p. 7193), which became Law No 1034 of 18 December 1970 (Gazzetta Ufficiale della Repubblica Italiana No 323 of 23 December 1970, p. 8543), considerably increased the rate of the tax banderoles on spirits obtained from cereals and sugarcane; on the other hand, the rates of the tax banderoles remained unchanged with regard to other spirits, in particular spirits distilled from wine and marc, and was maintained at a markedly lower level.

The comparative price in Italian lire of the tax banderoles for the various types of spirits is as follows :

Since those duties taxed the imported products, such as whisky and rum, more heavily than national products, such as spirits obtained by distilling wine and spirits obtained from marc and fruit, the Commission asked the Italian Government on 17 January 1974 for an explanation of that difference in treatment.

In its reply of 4 May 1974, the Italian Government maintained principally that Italy has its own production of spirits obtained from cereals arid sugarcane obtained by coupage with the addition of ethyl alcohol and claimed, in the alternative, that the duty applied only to spirits prepared for the retail trade, that the statistics showed a larger increase in imports of spirits obtained from cereals and sugarcane than the increase in the production of spirits obtained by distilling wine and from marc and that the problems of the differences in taxation should be examined within the context of tax harmonization.

For its part, the Commission considered that the tax provisions in question were not compatible with the first and second paragraphs of Article 95 of the EEC Treaty. Taking the view that the Italian Republic was thus failing to fulfil its obligations under the Treaty, the Commission, by letter of 11 June 1976, initiated against Italy the procedure laid down in Article 169.

By letter of 28 July 1976, the Italian Government submitted its observations to the Commission in accordance with the first paragraph of Article 169 of the Treaty. In those observations it claimed in particular that there was no similarity between the various spirits, that the complaint of discrimination was unfounded and that other national products were not protected.

On 23 January 1978, the Commission delivered to the Italian Republic the reasoned opinion provided for in the first paragraph of Article 169 of the Treaty. In that opinion it found that the Italian Republic, by applying differentiated taxation, essentially handicapped imported products in comparison with similar home-produced products and was therefore failing to fulfil its obligations under Article 95 of the Treaty. The Italian Republic was requested to adopt within 15 days the necessary measures to comply with the Treaty.

By letter of 20 April 1978, the Italian Government informed the Commission that it saw no reason to abandon the present system of tax banderoles or the tax practice which that system makes possible.

II — Written procedure

By application, lodged on 7 August 1978, the Commission, in implementation of the second paragraph of Article 169 of the EEC Treaty, brought before the Court of Justice the alleged failure of the Italian Republic to fulfil its obligations under Article 95 of the EEC Treaty as regards the taxation of spirits.

The written procedure followed the normal course.

The Court, after hearing the report of the Judge Rapporteur and the views of the Advocate General, decided to open the oral procedure without a preparatory inquiry. However, it requested the Commission to reply in writing to several questions. That request was complied with within the prescribed period.

III — Conclusions of the parties

The Commission claims that the Court should:

Declare that the Italian Republic, by levying, after 26 October 1970, a differentiated tax which penalizes imported spirits (tax banderoles), has failed to fulfil its obligations under Article 95 of the EEC Treaty;

Order the Italian Republic to pay the costs.

The Government of the Italian Republic contends that the Court should:

Declare that the Commission's application is inadmissible, or, in any case, dismiss it as unfounded;

Order the Commission to pay the costs.

IV — Submissions and arguments of the parties during the written procedure

A — Admissibility

The Government of the Italian Republic considers that the Commission's application is inadmissible.

a) According to the actual statements of the Commission, differentiated taxation by means of tax banderoles is only one of the aspects of the tax discrimination which Italy reserved to spirits obtained from cereals or sugarcane by comparison with national products obtained from wine or marc. However, according to the case-law of the Court of Justice, discrimination with regard to internal taxation cannot be appraised separately; on the contrary, it is necessary to verify as a whole whether any difference in treatment exists. In this respect it is necessary also to take into account charges levied solely on national products but it is unfair to take them into account by reference to only one of the components of the total taxation levied on imported products. The alleged infringement should be appraised having regard to all taxation levied on the products in question; a single complaint cannot form the subject-matter of several separate procedures: a separate examination prevents the problem from being perceived as a unit and may constitute an unjustifiable precedent with regard to subsequent decisions of the Court. In view of the variety and the complexity of the various national tax systems, a solution to all the questions cannot be sought in piecemeal legal procedures each relating to certain specific aspects of the fiscal charge.

b) It claims that the Commission refers without distinction to the infringement of the first and second paragraphs of Article 95 of the Treaty. However, the scope of those provisions in no way permits of an identical solution to the problem to the effect that differentiated taxation is absolutely unlawful. It is for the Commission to define clearly the subject-matter and the scope of its application; however, instead of specifying the factors which constitute a protectionist situation and the evidence of its existence, it does no more than presume that the second paragraph of Article 95 has been infringed, confining itself to extremely general terms. Its application is therefore inadmissible.

The Commission rejects the objections of inadmissibility put forward by the Italian Government.

a) On the first point, it claims that it is necessary to state that the taxation levied in Italy on spirits is regulated by separate legislative instruments and that it is impossible to remedy by means of another law the effects of a national measure flowing from a law which is contrary to the Treaty. It is for the Italian Republic to show, if necessary, that the discrimination which forms the subject-matter of this application does not exist; the arguments would then relate to the validity and not to the inadmissibility of that application.

b) It follows from the case-law of the Court of Justice that Article 95 requires the abolition of all discrimination in trade between the Member States and that the second paragraph of that article forms the necessary supplement to the prohibition laid down in the first paragraph; the prohibition laid down in the second paragraph refers therefore to all taxation which is levied more heavily on imported products, regardless of the level of the increase. Since the legal treatment laid down in Article 95 is uniform, the function of those two paragraphs amounts to defining the objective field of application of the prohibition which they stipulate.

The reasoned opinion and the application leave no room for doubt: the difference in the rate of the tax banderoles must be totally abolished even if the spirits in question are considered to be competing products within the meaning of the second paragraph of Article 95.

B — The substance of the case

The Commission takes the view that the taxation in Italy in the form of tax banderoles levied on spirituous beverages intended for the retail trade is contrary to the first and second paragraphs of Article 95 of the EEC Treaty.

a) Having regard to the first paragraph of Article 95, it is necessary to state that the Italian Republic imposes on spirits produced in other Member States internal taxation in excess of that imposed on similar domestic products. Spirits obtained from cereals and sugarcane should in fact be considered to be products similar to other spirits: regardless of their consumer use, those products must all display certain common and well-defined characteristics. Moreover, there is practically no Italian production of spirits obtained from cereals and sugarcane.

b) With regard to the second paragraph of Article 95, it is necessary to bear in mind that even assuming that the similarity between spirits obtained from cereals and sugarcane on the one hand and other spirits on the other were contested, they would nevertheless be interchangeable products in competition with one another. Consequently, since the Italian production of spirits obtained from cereals and sugarcane is negligible, the effect of taxing the latter products more heavily is to protect the very large national production of spirits obtained by distilling wine and spirits obtained from marc.

c) Contrary to the statements of the Italian Government, the production of spirits manufactured directly in Italy from alcohol obtained from cereals or sugarcane is in fact nonexistent. The figures put forward with regard to alcohol obtained from sugarcane are in complete contradiction to the statistics supplied to the Commission by the Italian ministerial authorities; moreover, they consist only of assessments and estimates. As far as alcohol obtained from cereals is concerned, the official statistics transmitted by the Italian Ministry of Finance show a production of 78 hectolitres in 1975, 4 hectolitres in 1976 and no production in 1977. Moreover, it is impossible on the basis of the Community rules on origin and of the nomenclature of the Common Customs Tariff to consider spirits which are the result of a mixture and are obtained by adding water and pure alcohol obtained from Italian wine to genuine whisky or rum imported from the countries of origin to be an (originating) “domestic product” within the meaning of Article 95. The “general pattern of traditional economic policy” referred to by the Italian Government in order to justify the very small production of spirits obtained from cereals is irrelevant in this case; it is in any event incompatible with the objectives of Article 95. Moreover, it was achieved exclusively by means of ctaxation: a differentiated rate of the State tax which discriminated against imported products, tax banderoles and value-added tax. In fact, the Italian Government is attempting to justify the failure to fulfil its obligations under the Treaty which forms the subject-matter of this case by relying upon measures which are themselves the subject-matter of other procedures under Article 169.

d) In any case, the existence of national production does not justify a tax system involving differentiated rates of tax if imported products do not benefit from the most favourable rate reserved to similar domestic products. The reasons put forward to justify any tax advantages reserved to specific products are completely irrelevant. In this instance, the most favourable rate of the tax banderole, which is that reserved to spirits obtained from marc, grappa, which is an exclusively Italian product, should be applied to all imported spirits as products similar to grappa without the raw material from which those spirits are derived coming into consideration. This statement is based on the interpretation of Article 95 resulting from the judgment of the Court of Justice of 10 October 1978 in Case 148/77, H. Hansen jun. and O. C. Balle GmbH & Co. v Hauptzollamt Flensburg [1978] ECR 1787.

e) Spirits obtained from cereals and sugarcane, on the one hand, and other spirits, in particular those obtained from wine and marc, on the other, are “similar” products within the meaning of the first paragraph of Article 95. In fact, it follows from the case-law of the Court of Justice that “similarity between products within the meaning of the first paragraph of Article 95 exists when the products in question are normally to be considered as coming within the same fiscal, customs or statistical classification, as the case may be”; moreover, “a comparison must... be made between the taxation imposed on products which, at the same stage of production or marketing, have similar characteristics and meet the same needs from the point of view of consumers”. The latter condition is certainly fulfilled in this case. The fact that the domestic product and the imported product are classified under the same heading of the Common Customs Tariff confirms that this condition is fulfilled. Spirits, whether obtained from cereals or wine and fruit, have, according to the Brussels nomenclature, similar properties and meet the same needs of consumers. The latter may obviously be determined and influenced by various factors (habits, individual preferences, local and national traditions, social, seasonal and climatic conditions, not forgetting fashion); however, on the market, spirits, as “finished” products, are, from the point of view of consumers, no longer supplementary but parallel products; in other words, they are similar products. The various spirits have, of course, characteristics which are peculiar to each of them; these characteristics depend on various factors (the raw materials used, methods of processing and presence of secondary flavourings and aromas, and so forth), but do not hinder the application of the first paragraph of Article 95 to the products in question: they are irrelevant for the purposes of the prohibition on tax discrimination laid down in that provision.

f) The basic problem posed by the second paragraph of Article 95 is that of determining criteria enabling “internal taxation of such a nature as to afford indirect protection” to other products to be identified. It follows from the case-law of the Court that internal taxation incompatible with the second paragraph of Article 95 is that which taxes imported products more heavily than domestic products with which they are in competition and which is therefore likely to produce protective effects. This protective effect must be abolished whatever the extent of it because it constitutes per se a barrier to trade and is as such incompatible with the objectives of Article 95. There is a link between the higher fiscal charge and the protective effect which is so close that it makes the economic appraisal of other effects of the fiscal charge or “effects of the protective effect” superfluous in relation in particular to the development of imports or the price structure. It is therefore impossible to contest the protective effect of a measure which imposes on imported products a duty 20 times higher than that to which comparable domestic products are subject on the pretext that imports of the product in question have developed considerably; it is necessary in fact to consider the potential increase in imports in a market free of all barriers to the free movement of goods.

g) According to the case-law of the Court, the prohibition on tax discrimination extends to cases in which the products are not in “direct competition” : even in the absence of all direct competition with domestic products, protection would exist if it were shown that imported products are subject to a special fiscal charge on the basis of their state of manufacture or marketing or any other economic fact such as to protect certain activities separate from those which served for the manufacture of the imported products. The field of application of the second paragraph of Article 95 is undoubtedly very wide. The interchangeability may not be total but limited to several uses; it may, moreover, vary according to the nature and characteristics of the product, on the one hand, and the needs and tastes of consumers, on the other. The criterion of the “typical nature” of the products has nothing to do with the requirements laid down in the second paragraph of Article 95. The increase in imports of spirits obtained from cereals and the parallel reduction in Italian production of spirits obtained from wine, marc and fruit constitutes the most significant and irrefutable indication of the preference of Italian consumers for foreign spirits. Contrary to the statements made by the Italian Government, this phenomenon can only be explained if it is acknowledged that the spirits in question are in competition with one another and may be substituted for one another. In fact, as the Italian Government admits, its traditional economic policy in the field of spirits tends, on the one hand, to direct production towards the distillation of fruit products of which there is generally a surplus in Italy, and, on the other, to check the increase in the production of beverages obtained by the distillation of raw materials other than cereals, sugarcane and potatoes.

h) With regard to the alleged need to appraise as a whole infringements of Article 95 in the field of alcoholic beverages, it is sufficient to state that the Commission has initiated procedures against several other Member States with regard to the taxation of alcoholic beverages in a whole series of significant cases. In initiating those procedures, the Commission rejects by implication the argument that it is necessary to have recourse to the instrument of harmonization for the purpose of abolishing trade barriers of a fiscal nature; the prohibition on tax discrimination laid down in Article 95, which has direct effect, cannot be made subject to the adoption of “implementing” provisions forming the subject-matter of harmonization directives within the meaning of Article 99 of the Treaty.

The Italian Government is of the opinion that the Commission's application is in any case unfounded even if it must be considered to be admissible.

a) The price of the tax banderole which is levied on spirits made from cereals and sugarcane is identical for both imported spirits and those produced in Italy. Since identical domestic and imported products are subject to an identical tax burden, a problem of the infringement of Article 95 cannot arise.

b) Contrary to the Commission's statements, Italy has a production of spirits obtained from cereals and sugarcane: in 1974, 4435 hectolitres of whisky and 11470 hectolitres of rum were produced; in 1975, 9355 hectolitres of whisky and 9553 hectolitres of rum were produced. The fact that a certain quantity of those products was obtained by coupage of 80 hectolitres of anhydrous alcohol produced directly is irrelevant: the tax banderole which is payable only for products in bottles is fixed according to the name of those products; it follows that domestic spirits, whatever the material from which they are obtained, are subject, since they are used for the preparation of a beverage which may be termed spirits obtained from cereals, to the higher tax provided for in the case of that product. It is necessary to take into consideration total production, in other words the production of whisky in bottles; in these circumstances, the ratio to be taken into account is that of 19000 hectolitres of whisky and rum against a total production of spirits obtained from wine and marc of slightly more than 300000 hectolitres.

c) For the purposes of the application of the first paragraph of Article 95 the fact that domestic production, albeit unimportant, exists and, even more, that a production of that kind may exist, is decisive. The first paragraph of Article 95 is in fact a provision supplementary to the provision prohibiting customs duties and charges having an equivalent effect; it is intended solely to guarantee competitive neutrality where products are equal and not to restrict the tax autonomy of Member States. The Member States may, by virtue of their tax autonomy, reserve different treatment for tax purposes to products which, even if they are all domestic, may be considered to be similar; the effect of this is to give preferential treatment to certain categories of products in comparison with others, which are also domestic, but not to constitute a breach of Article 95.

d) In any case, spirits obtained from cereals and those obtained from wine and marc are not similar products: they are, on the contrary, absolutely different products, both by virtue of the basic raw material and of the manufacturing process, of the characteristics of the products and of the very composition as regards alcohol. The products in question, having regard to their respective characteristics, cannot be considered to be similar. In fact, moreover, they are not similar: the choice of consumers is always specific, determined by taste, habits, the true or presumed qualities of the product and also by health considerations. This statement is confirmed by the massive increase in the consumption of spirits obtained from cereals as compared with the small increase in the consumption of spirits obtained from wine and marc; imports into Italy of whisky during the last five years, in other words after the increases in the charge in question were introduced, rose from less than 100000 to more than 200000 hectolitres, whereas the consumption of spirits obtained from wine and marc stayed at considerably lower levels with a total increase of barely 10%.

e) An analysis carried out on the basis of the Common Customs Tariff is only of subsidiary value; it confirms, however, the fact that the spirits in question are not similar. The Common Customs Tariff unites under the same heading a series of products which may represent a type within which, by means of the subheadings, the kinds, in other words, the various products with a personality of their own and a specific individual characteristic, are then more appropriately sought. The question of similarity should be determined having regard to the products listed in the subheading with a corresponding separate number; those products were considered to be different when the Common Customs Tariff was introduced, so much so that provision was made for tax arrangements involving different rates.

f) As far as the second paragraph of Article 95 is concerned, it is necessary to bear in mind that that provision, far from having the wide purport which the Commission attempts to give to it by practically considering it to be a final provision the objective of which is to “abolish all discrimination between imported products and domestic products which, in any way whatever, are in lawful confrontation with one another in the common market”, has a markedly more limited scope. Just like Article III, No 2 of the General Agreement on Tariffs and Trade, with which it displays a strong analogy, the second paragraph of Article 95 merely prohibits taxation of such a nature as to protect other products, in other words without imposing uniformity of the rates of tax, and merely intends to prevent taxation from being able to constitute “indirectly” protection for other products. The purport of the prohibition imposed on the Member States is the same whether the products are in competition or special charges are levied of such a nature as to protect other activities; it follows from the case-law of the Court that “the effects of a tax on the economic relationships referred to in the second paragraph of Article 95 must be assessed in the light of the objectives of Article 95, which are to ensure normal conditions of competition and to remove all restrictions of a fiscal nature capable of hindering the free movement of goods within the Common Market” with the result that it is necessary to decide “the level below which the tax in question would cease to have the protective effects prohibited” by Article 95. Thus, Article 95 requires that the rates of tax in the case of similar products should be uniform and that the charge should be fixed at a level at which it cannot produce protective effects in the situation provided for in the second paragraph of Article 95. However, in this case it has in no way been shown that the higher price of the tax banderole, produces a protective effect and, moreover, imports into Italy of whisky have undergone a massive increase whereas the consumption of spirits obtained from wine and marc which are products which supposedly benefited from. indirect protection, increased only very slightly.

g) In any case, spirits obtained from cereals, on the one hand, and those obtained from wine and marc, on the other, are not in competition. The second paragraph of Article 95 envisages direct competition; it therefore takes into consideration an affinity between products such that the consumers' decision may in fact only be influenced by extrinsic factors, in particular the price which, in its turn, is influenced by tax burdens. They must be products which are directly interchangeable; this cannot be the case with spirits obtained from cereals on the one hand and spirits obtained from wine and marc on the other. In fact, those are products which are so typical by virtue of their characteristics and the reasons on the basis of which consumers are guided in making their choices (in particular health considerations) that preference for one or other product cannot be dictated solely by price.

h) The criteria on which Article 95 is based, in other words to ensure tax neutrality (the first paragraph) or to fix tolerable tax limits which do not prevent fair competition between products which are directly interchangeable (the second paragraph) are different from those which, left to the discretion of the Council on the basis of broader needs, justify the adoption of the measures laid down in Articles 99 and 100 of the Treaty. The tax policy intended to harmonize taxation in particular with regard to excise duties and other indirect taxation, may seem appropriate in respect of a series of products with regard to which the jurisdiction of the Member States remains intact because the conditions laid down in Article 95 have not been fulfilled. In such a situation, the only instrument can be that of directives; in order to attain a uniform system for alcoholic beverages, it is necessary to have recourse to appropriate measures which come within the jurisdiction of the Council and not to broad interpretations which are applicable only to limited cases and are likely to aggravate the existing imbalances. The inappropriate nature of solutions by sector by means of decisions relating to individual cases is emphasized by the very actions of the Commission which lodged applications simultaneously against several Member States whilst insisting therein on the need for a joint examination.

i) The judgment of 10 October 1978 in Case 148/77 (Hansen) fully confirms the validity of the conclusions put forward by the Italian Government.

It follows in particular from that judgment that, in the present state of Community law and in the absence of harmonization of the relevant provisions, the Member States are not prohibited from “granting tax advantages, in the form of exemption from or reduction of duties, to certain types of spirits or to certain classes of producers”; such advantages may “serve legitimate economic or social purposes” which may be freely appraised by the Member State wishing to use that power. Thus Article 95 does not restrict the tax autonomy of the Member States which may provide for differentiated treatment in each trade sector.

Since what is involved is a tax which is differentiated according to the type of product, the requirements laid down in Article 95 are fully satisfied where in respect of each type of product uniform rates of tax have been laid down for domestic production and for products imported from other Member States; in this instance that condition has been fully satisfied.

Article 95 intends to prevent domestic products benefiting from a more favourable system than those of other Member States. It in no way requires that domestic products should be subject to less favourable treatment. If it were always necessary to make imported products subject to the most favourable system of those applicable to the various types of a product on the national territory, the tax autonomy of the Member States would be reduced to the absurd power of creating onerous discrimination against a certain number of domestic products.

The first paragraph of Article 95 in no way creates a general duty to apply to imported products the lowest rate provided for by the internal system even if the product is similar to the type of product for which the internal system prescribes the higher rate; similarly, where there is no similarity with any of the types of product subject to a differentiated internal tax, it is necessary, for the purposes of the application of the second paragraph of Article 95, to examine whether the imported product is in competition with home-produced products and whether, in practice, the latter benefit from unjustified protection.

In so far as the tax autonomy given to Member States makes the differentiation lawful and in so far as the imported products are subject to the same system as that applicable to home-produced products of a corresponding type, Article 95 is complied with fully. If, for “economic and social reasons” legitimately coming within the autonomous discretion of the Member States, the latter may fix different rates of tax for the various types of spirits manufactured from different raw materials, it is necessary to accept in the same way that for the purposes of the application of Article 95 it is only necessary to ensure that for each type the rates of tax are fixed uniformly for home-produced products and imported products. As regards Italy, there is no doubt that such uniformity has been fully complied with.

V — Replies to the questions put by the Court

In its written replies to the questions put by the Court, the Commission recalled in particular that, by reasoned opinions of 31 July 1978 and 8 February 1979, it also contested the compatibility with the Treaty of the Italian spirits tax system with regard to the normal State duty, the special State duty, the manufacturing tax and value-added tax.

As for the work in progress at the Community level with regard to alcohol production and the harmonization of tax systems, it is necessary to emphasize first of all that there is no relationship of cause and effect between the fact that the proposal for a directive on the harmonization of excise duties on alcohol and the proposals for a regulation on the organization of the market in agricultural alcohol were not adopted in due time, on the one hand, and the fact that the prohibition on tax discrimination laid down in Article 95 of the Treaty has not been complied with, on the other. The latter provision may henceforth be fully effective; it is not justified to make the abolition of tax barriers subject to the adoption by the Council of the directive or regulation in question.

Moreover, the proposal for a directive on the harmonization of excise duties on spirits (Journal Officiel 1972 No C 43, p. 45) is based on the principle of the similarity between all spirits and on the need to make the products subject to a tax system with a single rate per hectolitre of pure alcohol. The proposal for a regulation on the common organization of the market in ethyl alcohol of agricultural origin and additional provisions (Journal Officiel 1972 No C 43, p. 3 and Official Journal 1976 No C 309, p. 2) provides for measures concerning the production of alcohol and intervention systems (price compensation, withdrawal from the market and sales to reserve sectors), measures relating to alcoholic beverages (grant of aid and the imposition of equalization charges), measures of commercial policy and general provisions. Spirits obtained by distilling wine are only partially referred to by that proposal, the intervention measures which are appropriate and necessary for the purpose of maintaining the price of those products being expressly governed by the Community rules on wine (Council Regulation (EEC) No 337/79 of 5 February 1979 on the common organization of the market in wine, Official Journal 1979 No L 54, p. 1). The Community already has appropriate economic means for settling the most important problem, that of the compensation for the difference between the production costs of spirits obtained by distilling wine on the one hand and products based on other agricultural raw materials, in particular cereals, on the other. These mechanisms can only operate correctly if they act on a market which is neutral from a tax point of view. The delay which has been noted in the progress of the Council's work on the proposals put forward by the Commission is largely due to the existence on the internal level of discriminatory national tax measures ensuring national products additional protection which is in no way justified against competing products from other Member States.

Taxation which is levied on national products and similar and/or competing imported products within the meaning of Article 95 not only at the same rate but according to the same structure, on the one hand and internal taxation which, whilst constituting differentiated treatment from a tax point of view as regards rates and the structure of the tax, so as to benefit specific types of national product, is imposed on imported products without discrimination, in other words which extends to imported products the more favourable treatment for tax purposes reserved to certain similar and/or competing domestic products within the meaning of Article 95, on the other, is compatible with Article 95. The essential factor is that the principle of the neutrality of taxation in intra-Community trade should be observed unconditionally. These statements are in accordance with the case-law of the Court, in particular the judgment in Case 148/77 (Hansen).

VI — Oral procedure

The Commission, represented by Antonino Abate, and the Italian Government, represented by Ivo Maria Braguglia, presented oral argument and replied to questions put by the Court at the hearing on 9 October 1979.

The Advocate General delivered his opinion at the sitting on 28 November 1979.

Decision

1. By application of 7 August 1978, the Commission lodged under Article 169 of the EEC Treaty an application for a declaration that the Italian Republic, by applying differential taxation on spirits, has failed to fulfil its obligations under Article 95 of the EEC Treaty.

2. At the same time, the Commission submitted to the Court of Justice applications against the Kingdom of Denmark and the French Republic relating to problems of the same nature. The applications contain, in all three instances, certain general considerations from which it follows that those applications form part of a general action aiming to ensure that the Member States concerned comply with the obligations imposed on them by the Treaty in this respect. It therefore seems appropriate to clarify first of all certain questions of principle common to the three cases as regards the interpretation of Article 95 in the light of the special features of the market in spirits.

The interpretation of Article 95

3. Under the first paragraph of Article 95 “No Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products”. The second paragraph of that article adds as follows: “Furthermore, no Member State shall impose on the products of other Member States any internal taxation of such a nature as to afford indirect protection to other products”.

4. The abovementioned provisions supplement, within the system of the Treaty, the provisions on the abolition of customs duties and charges having equivalent effect. Their aim is to ensure free movement of goods between the Member States in normal conditions of competition by the elimination of all forms of protection which result from the application of internal taxation which discriminates against products from other Member States. As the Commission has correctly stated, Article 95 must guarantee the complete neutrality of internal taxation as regards competition between domestic products and imported products.

5. The first paragraph of Article 95, which is based on a comparison of the tax burdens imposed on domestic products and on imported products which may be classified as “similar”, is the basic rule in this respect. This provision, as the Court has had occasion to emphasize in its judgment of 10 October 1978 in Case 148/77, H. Hansen jun. & O. C. Balle GmbH & Co. v Hauptzollamt Flensburg [1978] ECR 1787, must be interpreted widely so as to cover all taxation procedures which conflict with the principle of the equality of treatment of domestic products and imported products; it is therefore necessary to interpret the concept of “similar products” with sufficient flexibility. The Court specified in the judgment of 17 February 1976 in the REWEcase (Case 45/75 [1976] ECR 181) that it is necessary to consider as similar products which “have similar characteristics and meet the same needs from the point of view of consumers”. It is therefore necessary to determine the scope of the first paragraph of Article 95 on the basis not of the criterion of the strictly identical nature of the products but on that of their similar and comparable use.

6. The function of the second paragraph of Article 95 is to cover, in addition, all forms of indirect tax protection in the case of products which, without being similar within the meaning of the first paragraph, are nevertheless in competition., even partial, indirect or potential, with certain products of the importing country. The Court has already emphasized certain aspects of that provision in its judgment of 4 April 1978 in Case 27/77, Firma Fink-Frucht GmbH v Hauptzollamt München-Landsberger Straße [1978] ECR 223, in which it stated that for the purposes of the application of the first paragraph of Article 95 it is sufficient for the imported product to be in competition with the protected domestic production by reason of one or several economic uses to which it may be put, even though the condition of similarity for the purposes of the first paragraph of Article 95 is not fulfilled.

7. Whilst the criterion indicated in the first paragraph of Article 95 consists in the comparison of tax burdens, whether in terms of the rate, the mode of assessment or other detailed rules for the application thereof, in view of the difficulty of making sufficiently precise comparisons between the products in question, the second paragraph of that article is based upon a more general criterion, in other words the protective nature of the system of internal taxation.

8. The application in this instance of the criterion of similarity, which determines the scope of the prohibition laid down in the first paragraph of Article 95, has given rise to differences of opinion between the parties. According to the Commission, all spirits, whatever the raw materials used for their manufacture, have similar properties and in essence meet the same needs of consumers. Therefore, whatever the specific characteristics of the various products coming within that category and whatever the consumer habits in the various regions of the Community, spirits as finished products represent, from the point of view of consumers, a single general market. It is necessary to observe that this concept is expressed in the proposals submitted by the Commission to the Council for the establishment of a common organization of the market in alcohol, based on the application of a single rate of tax for all the products in question on the basis of their pure alcohol content.

9. This concept is contested by the governments of the three defendant Member States. In their opinion, it is possible to distinguish in the case of spirits various categories of product which differ either in terms of the raw materials used or of their typical characteristics or of the consumer habits observed in the various Member States.

10. In this connexion, the Commission points out however that the appraisal of the characteristics of the various alcoholic beverages, in the same way as consumer habits, is variable in time and space and that such factors cannot provide valid criteria as regards the Community taken as a whole. It draws attention moreover to the danger of hardening such habits by means of tax classifications made by the Member States.

11. These arguments prompt the following reply from the Court. The application of the provisions of Article 95 to specific national situations forming the subject-matter of the applications submitted by the Commission must be examined in the context of the general state of the market in alcoholic beverages within the Community. In this respect it is necessary to take into account three lines of thought: (a) it is impossible, first of all, to disregard the fact that all the products in question, whatever their specific characteristics in other respects, have -common generic features. All are the outcome of the distillation procedure; all contain, as a principal characteristic ingredient, alcohol suitable for human consumption at a relatively high degree of concentration. It follows that within the largest group of alcoholic beverages spirits form an identifiable whole united by common characteristics; (b) in spite of those common characteristics, it is possible to distinguish within that whole products which have their own more or less pronounced characteristics. Those characteristics spring either from the raw materials used (in this connexion it is possible to distinguish in particular spirits distilled from wine, fruit, cereals and sugarcane), or from manufacturing processes or, again, from the flavourings added. Typical varieties of spirits may in fact be defined by these particular characteristics, so much so that some of them are even protected by registered designations of origin; (c) at the same time, it is impossible to disregard the fact that there are, in the case of spirits, in addition to well-defined products which are put to relatively specific uses, other products with less distinct characteristics and wider uses. There are, on the one hand, numerous products derived from what are known as “neutral” spirits, in other words spirits of all origins including molasses alcohol and potato alcohol; these products owe their individuality only to flavouring additives with a more or less pronounced taste. On the other hand, it is necessary to draw attention to the fact that in the case of spirits there are products which may be consumed in very different forms, either neat or diluted or, again, jn the form of mixtures. These products may therefore be in competition with a range of varying size of other alcoholic products of more limited use. A characteristic of the three cases brought before this Court is however the fact that in each there are, in addition to well-defined spirits, one or several products with a broad range of uses.

12. Two conclusions follow from this analysis of the market in spirits. First, there is, in the case of spirits considered as a whole, an indeterminate number of beverages which must be classified as “similar products” within the meaning of the first paragraph of Article 95, although it may be difficult to decide this in specific cases, in view of the nature of the factors implied by distinguishing criteria such as flavour and consumer habits. Secondly, even in cases in which it is impossible to recognize a sufficient degree of similarity between the products concerned, there are nevertheless, in the case of all spirits, common characteristics which are sufficiently pronounced to constitute evidence in all cases of at least partial or potential competition. It follows that the application of the second paragraph of Article 95 may come into consideration in cases in which the relationship of similarity between the specific varieties of spirits remains doubtful or contested.

13. It appears from the foregoing that Article 95, taken as a whole, may apply without distinction to all the products concerned. It is sufficient therefore to examine whether the application of a given national tax system is discriminatory or, as the case may be, protective, in other words whether there is a difference in the rate or the detailed rules for levying the tax and whether that difference is likely to favour a given domestic production. It will be necessary to examine within this framework the economic relationships between the products concerned and the characteristics of the tax systems which form the subject-matter of the disputes in the case of each of the applications lodged by the Commission.

14. In the various procedures, the parties have relied, with regard to the distinction between several categories of alcoholic product, upon certain statements made by the Court of Justice in the judgment in the Hansen & Balle case, supra, which was delivered at a time when these applications were pending. Reference has been made more particularly to a passage in that judgment which states as follows: “At the present stage of its development and in the absence of any unification or harmonization of the relevant provisions, Community law does not prohibit Member States from granting tax advantages, in the form of exemption from or reduction of duties, to certain types of spirits or to certain classes of producers. Indeed, tax advantages of this kind may serve legitimate economic or social purposes, such as the use of certain raw materials by the distilling industry, the continued production of particular spirits of high quality, or the continuance of certain classes of undertakings such as agricultural distilleries”.

15. Since certain of the defendant Governments have relied upon these statements in order to justify their tax system, the Court has asked the Commission questions as to the compatibility with Community law of the differences in the rates of tax applied to various categories of alcoholic beverages and as to its intentions in that respect within the context of the harmonization of tax legislation. The Commission, after restating its view that all spirits are similar and its intention to propose the introduction, at least in principle, of a single rate of tax in future Community regulations, draws attention to the fact that the problems linked to the use of certain raw materials, continued high-quality production and the economic structure of manufacturing undertakings to which the Court referred in the abovementioned judgment may be resolved by means of aid to producers or systems of compensation between producers, taking into account the difference in the cost of the raw materials used. It draws attention to the fact that this objective has already been attained within the context of the common organization of the market in wine as regards spirits obtained by distilling wine. According to the Commission, such mechanisms might safeguard the marketing chances of certain products which are handicapped by production costs, without its being necessary to have recourse for this purpose to the procedure of variation in the rates of tax.

16. In view of these observations, the Court points out that although it acknowledged in the judgment in the Hansen & Balle case, taking into account the state of development of Community law, that certain tax exemptions or tax concessions are lawful, this is on condition that the Member States using those powers extend the benefit thereof without discrimination to imported products in the same conditions. It is necessary to emphasize that it was acknowledged that those practices were lawful in particular so as to enable productions or undertakings to continue which would no longer be profitable without these special tax benefits because of the rise in production costs. On the other hand, the considerations expressed in that judgment cannot be understood as legitimating tax differences which are discriminatory or protective.

The subject-matter of the dispute and the admissibility of the application

17. The application lodged by the Commission relates to the affixing, laid down by the Italian tax legislation resulting from the provisions of Article 6 of Decree Law No 745 of 26 October 1970 (Gazzetta Ufficiale della Repubblica Italiana, p. 7193), ratified by Law No 1034 of 18 December 1970 (Gazzetta Ufficiale della Repubblica Italiana, p. 8543), of tax banderoles on receptacles containing spirits intended for retail. It appears from those provisions that those rates, which are on a graduated scale according to the capacity of the receptacles, are, as far as spirits obtained from cereals and sugarcane are concerned, several times the rates applicable to spirits obtained from wine and marc. The Commission considers that this tax system is contrary to the provisions of Article 95 of the EEC Treaty in that the heaviest rates of tax are levied on products which are, essentially, imported products, whereas the most favourable rates of tax are reserved to spirits obtained from wine and marc which are typically Italian products.

18. In its application, the Commission points out the fact that the system of tax banderoles forms only one of the aspects of the Italian system of tax on spirits which contains in addition other taxes, in other words the “State tax”, levied at the production stage, and the value-added tax, which is levied at the marketing stage. Procedures for a declaration that the Italian Government has failed to fulfil its obligations under the Treaty based on Article 169 of the Treaty are pending owing to the discriminatory features of those two tax systems.

19. The Italian Government contests the admissibility of the application because of the fact that the Commission has thus separated the question of the tax banderoles from the other components of the tax arrangements applicable to spirituous beverages. According to the Italian Government, this presentation of the application prevents the problem from being perceived as a whole and may well thus lead the Court to prejudge the situation in the light of a secondary feature of the tax system in question.

20. This objection of inadmissibility cannot be accepted. Although it may appear advantageous to examine as a whole a system of tax which gives rise to criticism on the part of the Commission from various aspects, the system of tax banderoles nevertheless constitutes within the system in question as a whole a perfectly separable factor which may as such be appraised separately. It is clear that in these circumstances the scope of the judgment of the Court cannot extend further than the facts brought before it and that therefore no prejudice can flow from it with regard to the solution of other connected problems.

21. It is appropriate to recall in addition that according to the Italian Government the application, which was introduced principally on the basis of the first paragraph of Article 95, is inadmissible in so far as the Commission has based it simultaneously, in the alternative, on the second paragraph of the same article, relying, as regards the second infringement complained of against the Italian Republic, on extremely general terms.

22. It is sufficient to point out that this defence put forward by the Italian Government in fact comes within the substance of the dispute and must therefore be examined with the substance of the case.

23. As regards the substance of the case, the Italian Government puts forward two series of arguments as regards the lack of similarity within the meaning of the first paragraph of Article 95 between the products which are subject to differential taxation and the absence of indirect protection for national production under the second paragraph of Article 95.

The appraisal of the contested tax system

24. In accordance with the viewpoint recalled above, the Commission considers that the products classified by the Italian legislation in separate tax categories — spirits obtained from cereals and sugarcane on the one hand, and spirits made from wine and marc, on the other — must be considered to be “similar” products within the meaning of the first paragraph of Article 95 of the Treaty.

25. The application lodged by the Commission is based in the alternative on the complaint that the Italian Republic has been in breach of the second paragraph of Article 95 if the Court does not recognize the existence of a relationship of similarity between the products referred to. The Commission considers that in spite of their typical characteristics, the various types of spirits in question, in that they are substitute products, are at least in the competitive situation referred to by the second pararaph of Article 95. That situation is illustrated by the efforts made by certain Member States to obtain protection for the registered designations of origin of certain spirits which would not be of interest if those products were entirely distinct from other competing products.

26. As regards the application of the first paragraph of Article 95 the Italian Government contests that products classified in various categories for the purpose of the fixing of tax banderoles — spirits obtained from cereals and sugarcane, on the one hand, and spirits obtained from wine and marc, on the other — may be considered to be “similar” products within the meaning of that provision. Referring to criteria laid down by the Court in the judgment in the REWE case, supra, the Italian Government points out that without minimizing the importance of the characteristics of a product from the point of view of consumers, that factor should however not be given such precedence that the substantive criteria based on the difference in raw materials, the type of spirit and the manufacturing processes are disregarded. The Italian Government considers in fact that by the application of various manufacturing processes to the different raw materials — wine, marc, fruit, molasses, cereals or cane-juice — spirits of very different types are obtained, each of which constitutes so to speak a world of its own and which any consumer can distinguish without difficulty.

27. In this instance, according to the defendant government, they are “absolutely different” products, both by the diversity of basic raw materials and by the manufacturing processes and the typical characteristics of the products resulting from the combination of those two factors. Experience shows that the choice of consumers is always very specific, determined by taste, habits and the true or presumed qualities of the products, including their characteristics as regards health.

28. Moreover, the Italian Government relies upon the customs classification as appears in the subdivisions of tariff subheading 22.09 C of the Common Customs Tariff within which, to be precise, rum and whisky form specific subdivisions. In addition it draws attention to the fact that in the nomenclature of the customs statistics, whisky and spirits obtained from wine and marc bear separate statistical numbers.

29. The Italian Government considers that the complaint of discrimination put forward by the Commission is unfounded whereas, in its view, the price of the tax banderole levied on spirits from cereals and sugar cane is identical as regards both imported spirits and those produced in Italy. In the same way, imported spirits obtained from wine and marc are taxed at the same rate as the corresponding national spirits. Thus the principal of equality of treatment is complied with in respect of the same products whatever their origin.

30. As regards the application of the second paragraph of Article 95, the Italian Government claims that that provision does not refer, as the Commission seems to believe, to the difference between the taxation imposed on domestic products and imported products but to the protective nature of a given national tax system. However, in spite of the difference in the rates of tax applicable, it appears that imports of whisky into Italy have undergone a massive increase whereas the consumption of spirits obtained from wine and marc has only grown slightly. In short, the Commission is attempting by its action to compel a levelling of the rates of tax by stating that all spirits are similar or at least competing within the meaning of Article 95.

31. The customs classification of alcoholic beverages, which was designed having regard to the requirements of external trade, cannot in this instance provide conclusive indications with regard to the appraisal of the criterion of similarity laid down in the first paragraph of Article 95 of the Treaty. The same remark applies to the customs statistics, the aim of which is to record the volume of movement of goods under the various tariff headings but which cannot supply an indication as to the competition between the goods classified in one or other of the various categories. This is all the more so when the distinctions made by the Italian tax legislation correspond only rather distantly to the subdivisions of tariff subheading 22.09 C of the Common Customs Tariff.

32. The Italian Government is no doubt correct when it emphasizes the importance of the raw materials and the manufacturing processes for the purposes of determining characteristic differences between various spirits. The Court took that factor into account in its judgment in the REWE case, in which it adopted, as a criterion of similarity, the characteristics of the products as much as the needs of the consumers. However, even if it were possible to identify certain typical beverages with clear characteristics which therefore correspond to specific uses, it is impossible to deny that there are on the market other alcoholic beverages which may be consumed in a great variety of circumstances, either neat or with water or in the form of mixes and which as such are capable of meeting the widest needs; this is inter alia the case of whisky and rum, the taxation on which forms the subject-matter of this dispute. This flexibility in particular enables the beverages of that type to be considered to be similar to a particularly large number of other alcoholic beverages or as being at least partially in competition with those beverages.

33. After considering all these factors, the Court takes the view that it is not necessary for the purposes of solving this dispute to give a ruling on the question whether or not the spirituous beverages concerned are partly or wholly similar products within the meaning of the first paragraph of Article 95, since it is impossible reasonably to contest that they are without exception in competition, at least partially, with the domestic products to which the application refers and, moreover, the protective nature of the Italian tax system within the meaning of the second paragraph of Article 95 cannot be denied.

34. In fact, as indicated above, spirits obtained from cereals and rum, as products of distillation, share with spirits obtained from wine and marc sufficient common characteristics to form, at least in certain circumstances, an alternative choice for consumers.

35. In these circumstances, the protective nature of the tax system criticized by the Commission is shown clearly. The main characteristic of it is in fact that the most typical domestic products, in other words spirits obtained from wine and marc, are in the most favoured tax category whereas the two types of product almost all of which is imported from other Member States, in other words rum and spirits obtained from cereals, are subject to heavier taxation. The fact that domestic production of those spirits also exists does not alter this assessment, since it is not contested that only minimal quantities are involved and that, in addition, the goods marketed under those names are, according to the Commission's uncontested statement, in fact blends of imported products with the addition of a high proportion of Italian spirits obtained from wine.

36. It is necessary to state in conclusion from the foregoing that the tax system applied in the Italian Republic resulting from the legislative provisions mentioned above is incompatible with the requirements laid down in Article 95 of the Treaty as regards the taxation of alcoholic beverages which are the result of the distillation of cereals and sugarcane, on the one hand, and spirits obtained from wine and marc, on the other.

Costs

37. Under Article 69 (2) of the Rules of Procedure, the unsuccessful party shall be ordered to pay the costs.

38. As the defendant has failed in its submissions, it must be ordered to bear the costs.

On those grounds, THE COURT hereby:

1 Declares that, by the application of differential taxation on spirits in the form of tax banderoles affixed to receptacles containing spirits intended for retail, as provided for by the Italian tax legislation resulting from the provisions of Article 6 of Decree Law No 745 of 26 October 1970, ratified by Law No 1034 of 18 December 1970, as regards, first, spirits obtained by the distillation of cereals and sugarcane and, secondly, spirits obtained from wine and marc, the Italian Republic, has failed, as regards products imported from the other Member States, to fulfil its obligations under Article 95 of the EEC Treaty.

2 The Italian Republic is ordered to pay the costs.