Report for the Hearing in Case C-203/89

I — Applicable Community legislation

1. Council Regulation (EEC) No 1579/86 of 23 May 1986 amending Regulation (EEC) No 2727/75 on the common organization of the market in cereals (Official Journal 1986 L 139, p. 29) introduced a co-responsibility levy on cereals produced in the Community and used for certain operations, in order to remedy the state of the Community cereals market which is characterized by structural surpluses resulting from an imbalance between supply and demand. According to Article 4(5) of Regulation No 2727/75, as amended by Regulation No 1579/86, ‘the co-responsibility levy shall be collected on cereals that undergo one of the following operations: (i) first processing; (ii) intervention buying; (iii) export in the form of grain’. Article 5(6) provides that ‘the levy shall be passed on to the producer’. The rules for applying the levy were laid down in Commission Regulation (EEC) No 2040/86 of 30 June 1986 laying down detailed rules for the application of the co-responsibility levy in the cereals sector (Official Journal 1986 L 173, p. 65), as amended by Commission Regulation (EEC) No 2572/86 of 12 August 1986 (Official Journal 1986 L 229, p. 25). According to Article 1(2) of Regulation No 2040/86, as amended, ‘for the purposes of this regulation, “first-stage processing” shall mean any treatment of grain such that the product obtained may no longer be classified under Chapter 10 of the Common Customs Tariff. Processing of cereals delivered to or placed at the disposal of an undertaking by a producer with a view to subsequent utilization on his holding shall be considered first-stage processing. Cereals shall be exempted from the levy where first-stage processing is carried out by the farmer on his own agricultural holding and the products of the processing are used as animal feed on the holding, provided that: (i) the processing machinery is part of the temporary or permanent agricultural installations of the farm, and (ii) if the holding is divided into more than one production unit, it is run by a single management using a single labour force and a single set of machinery and equipment for all the units comprising the holding ...’.

2. In view of the difficulties which arose in the application of the co-responsibility levy so introduced, Article 4 of Regulation No 2727/75 was amended once again, this time by Article 1(1) of Council Regulation (EEC) No 1097/88 of 25 April 1988 amending Regulation (EEC) No 2727/75 on the common organization of the market in cereals (Official Journal 1988 L 110, p. 7). The new wording of Article 4 provides, in particular, that subject to certain exemptions, the co-responsibility levy is to be payable by producers in respect of the cereals produced in the Community and placed on the market or sold to an invention agency. The concept of ‘placing on the market’ was defined in Article 1(2) of Commission Regulation (EEC) No 1432/88 of 26 May 1988 laying down detailed rules for applying the co-responsibility levy in the cereals sector (Official Journal 1988 L 131, p. 37). According to that provision ‘... “placing on the market” means sales (including barter operations) by producers to collection, trading and processing undertakings, to other producers and to the intervention agency. The following shall be treated as placing on the market: (i) the processing of cereals delivered or made available to an undertaking by a producer (work under contract) with a view either to subsequent use on his holding or to sale ... (ii) ... ’. According to the first subparagraph of Article 4(1) of Regulation No 1432/88, ‘the levies... shall be collected by the purchasers and by the processing undertakings. However, in the case of consignment of cereals by a producer to another Member State, of export of cereals by a producer to a third country or of delivery by a producer to recognized storage depots in the framework of a forward transaction, the levies shall be paid by the producer’. Article 10 of Regulation No 1432/88 repealed Regulation No 2040/86 of 30 June 1986.

3. By judgment in Case 300/86 Van Landschoot v Mera [1988] ECR 3443, on a reference for a preliminary ruling from the Vredegerecht (Cantonal Court) for the judicial district of Brasschaat, the Court held that: ‘The second subparagraph of Article 1(2) of Commission Regulation No 2040/86 of 30 June 1986, as amended by Commission Regulation No 2572/86 of 12 August 1986, is invalid in so far as it exempts from the co-responsibility levy the first-stage processing of cereals carried out on the producer's own agricultural holding by means of the machinery of the farm, provided that the products of the processing are used on that holding, but does not provide for such exemption for first-stage processing carried out off the producer's agricultural holding or by means of machinery which does not form part of the agricultural installations of the farm, where the products of the processing are used on that farm’. The Court added that it was for the Community legislature to act upon that judgment by adopting such measures as might be appropriate in order to establish equal treatment for operators as regards the contested exemption rules and that, in the meantime, the competent authorities were to continue to apply the exemption laid down in the provision at issue but were also to grant it to operators affected by the discrimination found to exist.

4. The Commission acted on that judgment by adopting two sets of provisions. First, it considered that Regulation No 1432/88 was vitiated by illegality for the same reasons as those established by the Court in the case of Regulation No 2040/86. It therefore amended Regulation No 1432/88 by adopting Regulation (EEC) No 2324/88 of 26 July 1988 (Official Journal 1988 L 202, p. 39), which entered into force on the date of its publication in the Official Journal of the European Communities, that is to say 27 July 1988. According to Article 1(2), as amended, ‘... “placing on the market” means sales (including barter operations) by producers of the products ... either as such or in the form of processed products... to collection, trading and processing undertakings, to other producers and to the intervention agency... ’. The rule that treated the processing of cereals in the form of work under contract as ‘placing on the market’ was repealed. In addition, according to the first subparagraph of Article 4(1), as amended, ‘the levies... shall be collected by the purchasers. However, the levies should be payable by the producers in the case of sales of the products referred to in Article 1(2), in the case of a consignment of cereals by a producer to another Member State, of export of cereals by a producer to a third country, or of delivery by a producer to recognized storage depots in the framework of a forward transaction’. Moreover, the Commission decided to reimburse the levies paid by traders who had been adversely affected by the rules which the Court had criticized as discriminatory in Regulation No 2040/86 and Regulation No 1432/88 before its amendment by Regulation No 2324/88. That is the purpose of Commission Regulation (EEC) No 3779/88 of 2 December 1988 on the reimbursement of the co-responsibility levy in the cereals sector provided for in Regulations (EEC) Nos 2040/86 and 1432/88 in respect of first-stage processing undertaken on a producer's account (Official Journal 1988 L 332, p. 17). Article 1(1) of that regulation provides that ‘the competent agencies designated by the Member States shall reimburse before 30 June 1989 to producers, on application by the latter, the amounts of co-responsibility levies withheld: (i) on processing operations on the producer's account as referred to in the second sentence of Article 1(2) of Regulation (EEC) No 2040/86, the product obtained from which has been used on the holding of the producer for animal feed; (ii) on operations for the processing of cereals delivered or made available to an undertaking by a producer (work under contract) for subsequent utilization on his holding by 26 July 1988 pursuant to Article 1(2) of Regulation (EEC) No 1432/88.’

II — Facts and procedure

1. On 16 September 1986 Mr Van Landschoot, the plaintiff in the main proceedings, sold 4925 kg of wheat to the defendant in the main proceedings, NV Mera, a company engaged in the production of compound feedingstuffs. On payment of the purchase price, Mera withheld the amount of BFR 1242 (4925 x 0.2522) by way of co-responsibility levy. Mr Van Landschoot instituted proceedings before the Vredegerecht for the judicial district of Brasschaat for an order that Mera should repay him the amount of BFR 1242 on the ground that the co-responsibility levy was contrary, in particular, to the general principle of equal treatment and to Article 40(3) of the EEC Treaty. The Vredegerecht requested the Court to give a preliminary ruling on the following question: ‘Is the co-responsibility levy for which the detailed rules of application are laid down by Regulation (EEC) No 2040/86 of 30 June 1986 valid?’ It was in response to that request for a preliminary ruling that the Court gave judgment on 29 June 1988, the operative part of which was referred to earlier.

2. In the light of that judgment, the Vredegerecht has once again been called upon to settle the dispute between Mr Van Landschoot and Mera. The plaintiff in the main proceedings claimed that, although he had sold 4925 kg of wheat to Mera, he had also purchased from it 13072 kg of compound feedingstuffs for laying hens, consisting as to 35%, or 4575 kg, of wheat and intended for feeding to hens on his holding. Consequently, the amount of the co-responsibility levy unduly withheld by Mera from the price payable to the plaintiff was to be reduced to BFR 1154 (4575 x 0.2522). According to Mr Van Landschoot, he was not liable to pay the levy since, by virtue of the Court's judgment of 29 June 1988, cereals sold by a producer to a processor and subsequently repurchased in the form of feed by the same producer and used by him as feed on his own holding were to be exempted from the co-responsibility levy. In its order for reference, the Vredegerecht refers to the submissions made before it, according to which the criterion for exemption laid down by the Court is that of the use on the producer's agricultural holding of the product yielded by the processing of the cereals supplied by him, and it is immaterial whether the cereals were supplied in order to be processed under contract or sold to a processor in order to be repurchased subsequently in the form of feed. However, the Vredegerecht points out that Commission Regulation No 3779/88 of 2 December 1988, which was adopted following the judgment given by the Court, restricts the possibility of obtaining repayment of the levy to cereals supplied or made available to an undertaking by a producer (work under contract), and not sold, with a view to their later use on the producer's own agricultural holding. Hence that regulation would appear to restrict the scope of the exemption, as laid down by the Court.

3. In those circumstances, the Vredegerecht for the judicial district of Brasschaat decided, by order of 21 June 1989, to stay the proceedings and to request the Court to give a preliminary ruling on the following question: The Vredegerecht's order for reference was received at the Court Registry on 30 June 1989.

‘Is Commission Regulation (EEC) No 3779/88 of 2 December 1988 valid in so far as it limits repayment of the co-responsibility levy to the first-stage processing of cereals which are supplied or made available to a processing undertaking by a producer (contract work) to the exclusion of cereals that are sold to such an undertaking even if they are later bought back by the producer in the form of feed with a view to using it on his own agricultural holding?’

4. In accordance with Article 20 of the Protocol on the Statute of the Court of Justice of the European Communities, written observations were submitted by NV Mera and the parties intervening in its support, represented by Ivo Van Bael and Jean-François Bellis, of the Brussels Bar, by the Italian Government represented by Ivo M. Braguglia, avvocato dello Stato, acting as Agent, and by the Commission of the European Communities, represented by Robert Caspar Fischer, Legal Adviser, acting as Agent,

5. On hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry.

III — Summary of written observations submitted to the Court

1. NV Mera and the parties intervening in its support (hereinafter referred to as ‘Mera’) maintain that the fundamental question is whether the Commission correctly acted upon the Court's judgment of 29 June 1988 by adopting the contested Regulation No 3779/88. According to Mera, that regulation has the effect of maintaining the discrimination prohibited by Article 40(3) of the Treaty. There is nothing in the judgment of 29 June 1988 which permits the scope of the exemption to be restricted to contract work alone or the levy to be collected on all sales of cereals without any distinction being drawn between, on the one hand, cereals sold by a producer and subsequently repurchased by him with a view to using the processed product on his own holding and, on the other, cereals sold by a producer and not subsequently repurchased by him, in any form whatsoever. Mera contends that Regulation No 3779/88, like Regulation No 2040/86, disregards the very purpose of the co-responsibility levy system, which is to restrict structural surpluses on the cereals market. It also disregards the reasoning followed by the Court in its judgment of 29 June 1988 and reaffirmed in the judgment of 11 July 1989 in Case 265/87 Schräder v Hauptzollamt Gronau [1989] ECR 2237. The sole criterion used by the Court in order to establish that the levy is not payable is the use on the producer's own holding of processed products, whether processed on the farm or by an industrial processor. It is immaterial whether the cereals were supplied to the processor for processing under contract or sold and then bought back from the processor in the form of feed. Furthermore, a producer who sells cereals to a processor and then repurchases from the latter compound feedingstuffs containing a quantity of cereals identical to that sold does not contribute to the creation or maintenance of structural surpluses on the cereals market any more than a producer of cereals who supplies cereals to the processor for processing under contract. Mera adds that to draw a distinction between processing under contract and sale followed by repurchase would be to allow legal form to prevail over economic reality, which is irreconcilable with the case-law of the Court, according to which, in the application of rules of law with economic aims, economic reality takes precedence over legal formalism (judgments in Case 170/83 Hydrotherm v Compact [1984] ECR 2999 and in Case 207/83 Commission v United Kingdom [1985] ECR 1201). There is no doubt, Mera acknowledges, that where the cereals are sold and then repurchased from an industrial processor, the cereals repurchased in the form of compound feedingstuffs by the producer may not be the same as those which he previously sold to the processor. However, that fact cannot be taken into account: in the first place, it is irrelevant in the light of the Court's judgment of 29 June 1988, and secondly, in a statement to the Management Committee for Cereals, the Commission acknowledged that given the fungible nature of cereals, the co-responsibility levy would not be applied in connection with processing under contract even if the processed cereals came not from the consignment produced by the producer but from another consignment of cereals of the same kind and quality. Mera therefore suggests that the answer to the question submitted for a preliminary ruling should be that Commission Regulation No 3779/88 is invalid ‘in so far as it limits repayment of the co-responsibility levy to the first-stage processing of cereals which are supplied or made available to an undertaking by a producer (contract work) to the exclusion of cereals that are sold to such an undertaking and later bought back, after processing, by the producer in the form of feed for use on his own farm’.

2. The Italian Republic emphasizes that, in the light of paragraph 11 of the Court's judgment of 29 June 1988, the aim of the co-responsibility levy justifies the imposition of the levy only on the processing of cereals placed on the market. Theoretically, it is possible to argue that when the cereals are sold by the producer to the processing undertaking, they are placed on the market, that no account is to be taken of the later repurchase of those cereals by the producer in the form of feed and that, accordingly, Article 1 of the contested regulation cannot be regarded as invalid. However, it is necessary to look beyond the theory and consider instead the actual substance of the relationship between producers and processors and its consequences on the market. That would bring out the decisive fact of the producer's repurchase of the cereals sold with a view to using them on his own holding as feed, with the result that the cereals are not placed on the market and are not therefore liable to the co-responsibility levy. On the basis of the real market situation rather than the theoretical aspects of the relationship between traders, the Italian Government comes to the conclusion that Commission Regulation No 3779/88 is invalid ‘in so far as it does not provide for repayment of the co-responsibility levy in a case such as that forming the subject of the main proceedings’. The Italian Government adds that this solution does not presuppose that the cereals sold by the producer be identical to those contained in the animal feed purchased and used by the same producer, since that is not required in the case of ‘work under contract’. It is essential to establish technical yield coefficients to make it possible to determine the percentage of cereals contained in the feed bought by the producer.

3. The Commission of the European Communities begins by outlining the relevant Community legislation. It also points out that, since certain facts are not apparent from the order for reference, it is necessary to proceed on the assumption that, in the dispute in the main proceedings, the sale of the cereals and the purchase of compound feedingstuffs were transactions legally and chronologically independent of one another and did not necessarily relate to the same cereals. The Commission points out that the first indent of Article 1(1) of Regulation No 3779/88 provides for the reimbursement of the amounts withheld pursuant to Regulation No 2040/86 ‘on processing operations on the producer's account... the product obtained from which has been used on the holding of the producer for animal feed’. In its question the national court refers not to ‘processing operations on the producer's account’ but to ‘cereals which are supplied or made available to a processing undertaking by a producer (contract work)’. That terminology refers to the second indent of Article 1(1) of Regulation No 3779/88, which concerns the reimbursement of the levies payable pursuant to Regulation No 1432/88. Although the co-responsibility levy at issue in the main proceedings was payable pursuant to Regulation No 2040/86, previously in force, the question refers to the levy system established by the new Regulation No 1432/88. In practice, since the national court has raised the question of the validity of the whole of Regulation No 3779/88, the question must be regarded as encompassing the two branches of the system of repayment established by that regulation. According to the Commission, the view that the exemption should also apply to the cereals sold to a processor by the producer and then bought back by him after processing, is factually incorrect and runs counter to the purpose of the exemption and the aim of the co-responsibility levy. The Commission argues that when the producer sells cereals to a processor, he places them on the market where he contributes to an increase in supply and to the fixing of prices. That effect cannot be eliminated by the fact that the processor sells an equivalent quantity of cereals, in the form of a processed product, to the same producer who uses that product as animal feed, a transaction which, moreover, also takes place on the market and therefore influences supply and the fixing of prices on the market in processed products. Thus the two transactions take place on the market and the processing and consumption of those cereals is not carried out within a closed circuit. In its interpretation of the judgment of 29 June 1988, the Commission emphasizes that in the operative part the Court criticizes the discrimination which stems from the fact that no provision is made for exemption from the levy ‘for first-stage processing carried out off the producer's agricultural holding or by means of machinery which does not form part of the agricultural installations of the farm ... ’. It is on the basis of a reasonable interpretation of that phrase that the Commission extended the exemption to first-stage processing carried out ‘on the producer's account’ or ‘under contract’. That interpretation is borne out by paragraphs 17 and 18 of the said judgment, in which the Court considered that it would not be discriminatory not to extend the exemption to a situation where the producers purchased cereals from other producers in order to process them on their own holdings and themselves to use the processed products as animal feed and where, consequently, the cereals were processed and used as animal feed by the same producer, that is to say within a closed circuit. Finally, the Commission points to the drawbacks of the solution advocated by the parties to the main proceedings. To begin with, that solution would increase the competitive advantage already enjoyed under the levy system by livestock farms which also produce large quantities of cereals since those farms, instead of having to opt in advance in favour of processing and using the cereals themselves, could first sell them to an industrial processor and then decide which animal feed they intended to purchase. Furthermore, that solution would lead to serious problems of supervision. Finally, it could lead to a situation in which large quantities of cereals which are in fact placed on the market and consequently influence supply and the fixing of prices thereon are ultimately exempted from the levy if the cereals sold and the cereals processed and bought back are subsequently set off against each other: as a result a very large proportion of the animal feed produced from cereals would escape the co-responsibility levy, which would seriously jeopardize its effectiveness.

F. Grévisse

Judge-Rapporteur

1 Language of the case: Dutch.

2 Mera points out that although the Vredegerecht's question refers only to Regulation No 3779/88, the validity of that regulation is closely connected with the validity of Regulation No 2324/88 It is by taking account of the concept of ‘placing on the market’ defined in the latter regulation with a view to restoring equal treatment for traders following the Court's judgment that Regulation No 3779/88 laid down the conditions for the reimbursement of the levy to traders.