Report for the Hearing in Case C-197/90

I — Facte and procedure

1. Relevant Community legislation

1.1. The system of financing the common agricultural policy

1. Council Regulation (EEC) No 729/70 of 21 April 1970 (Official Journal, English Special Edition 1970 I, p. 218) concerns the financing of the common agricultural policy. Article 1 provides that the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (hereafter ‘EAGGF’) is to finance refunds on exports to third countries and intervention intended to stabilize the agricultural markets. Such intervention is, according to Article 3 of the regulation, to be undertaken according to Community rules within the framework of the common organization of agricultural markets. Article 4 provides that Member States are to designate the authorities and bodies empowered to effect the expenditure referred to in Article 3. The annual accounts of those authorities and bodies, which Member Sutes are to transmit to the Commission, are under Article 5(1 Kb) to be made up by the Commission. Member States are also to provide it with the documents necessary so to make up the accounts. Article 9 imposes on Member Sutes the obligation to make available to the Commission all information required for the proper working of the EAGGF and to take all suitable measures to facilitate the supervision which the Commission may consider it necessary to undertake within the framework of the management of Community financing, including inspections on the spot. The third subparagraph of Article 9(2) provides that at the request of the Commission and with the agreement of the Member Sute, inspections or inquiries concerning the transactions referred to in Regulation No 729/79 are to be carried out by the competent authorities of that Member Sute.

2. Commission Regulation (EEC) No 1723/72 of 26 July 1972 on making up accounts for the Guarantee Section of the EAGGF (Official Journal, English Spedai Edition, Second Series III, European Agricultural Guidance and Guarantee Fund, p. 109) sets out the procedure whereby annual accounts are to be forwarded to the Commission, so that it can decide to make up the accounts as provided by Article 5(2)(b) of Regulation No 729/70. Article 8(a) of Regulation No 1723/72 sutes that that decision is to cover the determination of the amount of expenditure incurred in each Member Sute during the year in question, recognized as chargeable to the EAGGF, Guarantee Section.

3. Council Directive 77/435/EEC of 27 June 1977 on scrutiny by Member Sutes of transactions forming pan of the system of financing by the Guarantee Section of the EAGGF (Official Journal 1977 L 172, p. 17) provides in Article 3 that: Article 1 of that directive defines ‘commercial documents’ as follows:

‘Where undertakings are required to keep particular book records of stock in accordance with Community or national provisions, inspection of these records shall, in appropriate cases, include a comparison with the commercial documents and, where appropriate, the actual quantities in stock.’

‘For the purposes of this directive “commercial documents” means all the books, registers, vouchers and supporting documents, accounts and correspondence relating to the undertaking's business activity, in so far as these documents may be useful to the scrutiny referred to in paragraph 1.’

1.2. Aid for the processing of skimmed-milk powder

4. Under the common organization of the market in milk and milk products, aid is granted for the use of skimmed-milk powder in feedingstuffs. Commission Regulation (EEC) No 1725/79 of 26 July 1979 on the rules for granting aid to skimmed milk processed into compound feedingstuffs and skimmed-milk powder intended for feed for calves (Official Journal 1979 L 199, p. 1) lays down the inspection procedure for that aid. According to Article 10(1) and (2)(a), (b) and (c), Member Sutes are to carry out direct inspections of undertakings, while Article 10(2Xd) and (e) provide for scrutiny of documents. The latter must be thorough and unannounced (Article 10(2)(d)).

1.3. Aid for the consumption of olive oil

5. In the oils and fats sector, there is provision for aid for the consumption of olive oil. General rules in respect of that aid are laid down in Council Regulation (EEC) No 3089/78 of 19 December 1978 (Official Journal 1978 L 369, p. 12). Under Article 7, the Member States are to institute a system of supervision to ensure that olive oil in respect of which aid has been applied for qualifies for it. Article 8 provides that the aid may be advanced as soon as the application for aid is submitted, provided that sufficient security has been provided. That system of advance aid applies in Italy. So far as concerns the security, Article 11(3) of Commission Regulation (EEC) No 2677/85 of 24 September 1985 (Official Journal 1985 L 254, p. 5) stipulates that it is to be released as soon as the competent authority of the Member Sute has recognized entitlement to the aid in respect of the quantities shown in the application. In the absence of such recognition, the security is to be forfeit in proportion to die quantities in respect of which the conditions conferring entitlement to the aid were not complied with.

1.4. The system of securities

6. Commission Regulation (EEC) No 2220/85 of 22 July 1985 (Official Journal 1985 L 205, p. 5) lays down common detailed rules tor the application of the system of securities for agricultural products. The first paragraph of Article 29 reads as follows: Article 29 also provides that where payment has not been made by the end of that period, the security is to be cleared without delay to the appropriate account.

‘Once the competent authority is aware of circumstances giving rise to forfeiture of the security, in whole or in part, it shall without delay demand that the party required ... meet the obligation to pay the sum forfeited, allowing up to 30 days from the day of issue of demand for payment.’

2. Clearance of the accounts for 1987

2.1. Commission Decision 90/213/EEC of 19 April 1990

7. By Decision 90/213/EEC of 19 April 1990, the Commission amended Decision 89/627/EEC on the clearance of the accounts presented by the Member Sutes in respect of the expenditure of the Guarantee Section of the EAGGF (Official Journal 1989 L 359, p. 23) by refusing to allow charging to the Fund of certain expenditure by the Iulian Republic on processing aid for skimmed-milk powder and on aid for the consumption of olive oil.

8. This action seeks the annulment of Decision 90/213/EEC and more particularly its annulment in so far as concerns the refusal to allow charging to the Guarantee Section of the EAGGF of the following amounts: LIT 5862632980 on aid for the processing of skimmed-milk powder (paragraph 4.3.3 of the Further Summary Report of 12 March 1990); LIT 4352012388 on aid for the consumption of olive oil (paragraph 4.4 of the Further Summary Report of 12 March 1990). In its reply, the Italian Government stated that it was abandoning the head of claim concerning the implicit reservation in the Commission's Decision of 19 April 1990 as to LIT 28688711294. The submissions which the Italian Republic is not maintaining in support of its action are not set out hereafter.

2.2. Refusal to allow charging of expenditure in respect of processing aid for skimmed-milk powder

9. It is apparent from the documents before the Court that, in clearing the accounts for 1987, Commission staff carried out inspections, in particular at the premises of the three undertakings involved in the processing of skimmed-milk powder in the Province of Brescia (Frabes, Piodari and Wessanen). The Commission found that the inspections carried out by the Iulian authorities did not constitute thorough scrui'ny within the meaning of Article 10(2)(d) of Regulation No 1725/79. In order to prevent the aid which had been paid from being charged to the EAGGF, the Commission decided to invite the Italian authorities, on the basis of Regulation 729/70, to carry out further scrutiny of records at the premises of the three recipient undertakings. While awaiting the results of that further inspection, the Commission disjoined the expenditure at issue from the decision to clear the accounts for 1987.

10. Further scrutiny took place in October 1989. Although by letter of 20 November 1989 the Italian authorities concluded that the inspection confirmed that the three undertakings had acted quite properly, the Commission, by lener of 12 February 1990, expressed the view that further scrutiny did not amount to thorough scrutiny either. The Commission considered in particular that the reports submitted by the Italian authorities did not specify that an overall comparison had been carried out between the particular book records provided for in the legislation and the undertakings' accounts. Furthermore, those reports revealed certain deficiencies and lacunae. The Italian authorities disputed that finding in their repon of 10 March 1990.

11. In its Further Summary Report (hereafter ‘Further Repon’) of 12 March 1990, the Commission made clear its intention to reduce the expenditure relating to the three undertakings in question by a certain percentage to take account of the risk that their activities did not comply with the Community regulations because of inadequate supervision. That risk was evaluated at a flat rate of 10%. As a result, the Commission's Decision of 19 April 1990 disallowed charging to the EAGGF of 10% of the expenditure incurred on aid for the processing of skimmed-milk powder granted to the three undertakings in question.

2.3. Refusal to allow charging of expenditure in respect of aid for the consumption of olive oil

12. The Commission staff also noted delays in the inspections to determine entitlement to aid for the consumption of olive oil. Following that finding, the Commission invited Italy to carry out the necessary checks. In the light of the objective difficulties and the Italian authorities' intention to strengthen the inspection measures, the Commission disjoined the expenditure relating to the undertakings which had not been checked from the clearance of accounts for 1987. On the basis of the documents which the Iulian authorities had forwarded to it, the Commission, in its Further Report, made clear its intention not to accept an amount corresponding to the aid which was improperly granted and for which the security should have been forfeited. As a result, the abovementioned decision disallowed charging of the sums in question to the EAGGF.

II — Procedure

13. The Italian Republic's application was lodged at the Court Registry on 28 June 1990. The Italian Republic, the applicant, claims that the Court should: (i) annul Commission Decision 90/213/EEC of 19 April 1990 in so far as it disallows charging to the EAGGF of the sum of LIT 10214635868 in respect of expenditure for 1987; (ii) order the Commission to pay the costs. The Commission, the defendant, contends that the Court should: (i) dismiss the action for annulment of Commission Decision 90/213/EEC of 19 April 1990, brought by the Italian Republic, as unfounded; (ii) order the defendant to pay the costs. Upon 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 — Pleas in law and arguments of the parties

1. Expenditure relating to aid for processing skimmed-milk powder intended for animal feed {paragraph 4.3.3 of the Further Report)

14. According to the Further Report, the items to be checked in the further inquiry were indicated in both the Summary Report and the Commission's letter of 2 August 1989. In addition, during an on-the-spot check, the Commission's representatives indicated those items again to the inspectors of the Italian intervention agency, the Azienda di Suto per gli Interventi nel Mercato Agricolo (herearter ‘AIMA’). In the Commission's view, the following checks in particular should have been carried out: (a) a comparison of the totals of the particular book records, the stock records and the general accounts of the undertaking; (b) a comparison of the figures in the annual report and the particular book records; (c) a comparison of the stocks of raw materials, current output and the stocks of finished products. By letter of 20 November 1989, Italy forwarded the reports concerning the checks carried out. According to the Further Report, those reports contain no mention of making an overall comparison between the particular book records and the financial accounts of the undertakings. Although such a comparison was carried out for certain transactions, there is no certainty that all the quantities of skimmed-milk powder were incorporated and that there was accordingly no ‘substitution’.

15. The Further Report also notes that the said reports reveal certain deficiencies and lacunae in the checks carried out, namely: (a) the documents concerning the results of the undertakings' laboratory analyses and the manufacturing records were not examined; (b) at Plodari's premises, there are no records of raw materials or finished products; (c) no evidence was provided that an inventory of raw materials or finished products had been carried out; (d) as for Wessanen, a sale of 6800 kg of skimmed-milk powder and 6600 kg of premix is mentioned, with no explanation as to the forfeiture of the security; (e) Plodari sold compound feedingstuffs to certain dairies with no explanation being given as to the status of the buyer as user of the compound feedingstuffs.

16. The Further Report leads to the conclusion that the inspection by AIMA was deficient, most importantly in that there was no overall comparison between the entries in the records provided for by the regulations and the undertaking's accounts. Furthermore, it is not apparent from the documenti forwarded that further scrutiny carried out at the three undertakings' premises attained a sufficiently high level to guarantee that all the quantities of subsidized skimmed-milk powder were incorporated. In the light of the large amount of Community aid, that weakness is such as to jeopardize the grant of part of the aid.

17. The Italian Republic pleads infringement and misapplication of Articles 8, 9 and 10 of Regulation No 1725/79 of 26 July 1979, of Articles 1, 3, 5 and 9 of Council Regulation No 729/70 of 21 April 1970, and of Article 8 of Commission Regulation No 1723/72 of 26 July 1972, and of related provisions, and also fauure to give reasons. It maintains, first, that the Commission did not take account of the observations made known to it on 10 March 1990. The Italian authorities carried out the required inspection and made known their conclusion to the Commission within the period indicated by the latter. All the alleged inadequacies are set out in the Further Report of 12 March 1990 which is the Commission's final explanatory document. According to the Italian Government, that proves that its communication of 10 March was not taken into consideration at all by the Commission. At the meeting of 20 March 1990, the Commission merely confirmed its position. In failing to mention Italy's arguments to the contrary, the decision appears vitiated both for breach of the general and particular rules concerning supervision in conjunction with the rules for the financing of the common agricultural policy, and for failure to state reasons, or to give adequate reasons.

18. Secondly, the Italian Government claims that the EAGGFs criticisms as to the further scrutiny carried out in October 1989 are not well founded. In the Italian officers' repon of 10 March 1990, all the Commission's observations were meticulously refuted. The Italian Government considers that, contrary to the Commission's assertions, the checks carried out by the Italian authorities were not limited to a few transactions, but covered all the records by comparing the entries in AIMA's registers with those held for legal and fiscal purposes, and with the notes to the annual accounts and the stock records. In the records concerning the additional inquiries, the transactions carried out and the comparison were clearly described. For the most representative transactions, documentary evidence was sent. The Italian Government points out that the decree of the Italian Minister for Agriculture of 20 August 1984 contains in Annex 8 a standard form for the final inspection record. Since the record merely constitutes the document summarizing the inspection carried out, it does not go into the details of the different checks. However, despite its summary character, which the Commission has never disputed, the record demonstrates that the scrutiny was carried out effectively. Next, the Italian Government notes that three Commission officials carried out an on-the-spot inspection in conducting further scrutiny. They made inquiries concerning the checks which were carried out. The Italian Government adds finally that this case concerns relations between a Member Sute and the Commission. If a State declares that it has carried out an activity through civil servants, providing detailed information, either by way of particulars or examples, it is absolutely unacceptable for the Commission to dispute without justification the fact that the declared activities were carried out. So far as concerns the results of the three undertakings' laboratory analyses, the Italian Government claims that those analyses were carried out by State institutions and that they were checked and sent to the Commission. So far as concerns the analyses carried out by the undertakings themselves, it must be borne in mind that they are discretionary, voluntary and unofficial. In spite of those circumstances, those resulti were none the less recorded and checked and are available to the Commission. So far as concerns the manufacturing records, the Italian Government observes that, at the time of further scrutiny, they were no longer available. Neither national legislation nor Community rules require that those documents be retained. Further scrutiny related to substantially equivalent documents. Moreover, the Italian Government disputes the Commission's view that the records should be considered as commercial documents which must be scrutinized in accordance with Article 10(2)(d) of Regulation No 1725/79. The manufacturing records are simply lists of the ingredients necessary to produce a given quantity of feedingstuffs. As to the Commission's finding that Plodari's records of raw materials and finished products were not checked, the Italian Government observes that, because of its size, that undertaking was not required by Italian legislation to keep such records and that as a result, at the time of scrutiny, it was possible to compare only the actual stocks with those entered in AIMA's register. For 1987, the stock records were revised on the basis of the particular book records as shown in the balance sheet. Furthermore, that undertaking produced only 1500 tonnes of feedingstuffs for a total amount of LIT 1950000000. Finally, the Italian Government claims that the 6800 kg of skimmed-milk powder and 6600 kg of premix, which the Commission assumes is skimmed-milk powder subsidized by the EAGGF, were lawfully sold to other animal feed factories. It adds that the lack of continuity in the supervision carried out by the inspectorate continues to influence customs checks on processing. The purchases of compound feedingstuffs based on skimmed-milk powder by two farmers with holdings near Plodari are also perfectly legal. So far as concerns the use of die whey bought by Plodari, the Italian Government points out that the latter produces feedingstuffs based on milk powder which also contains whey, and feedingstuffs manufactured exclusively from whey. Thirdly, the Italian Government observes that there is no rule allowing the Commission to impose a flat-rate reduction of 10%. At most, it could have excluded the amount directly linked to the deficiencies which it found.

19. So far as concerns the applicant's first plea, the Commission sutes that the draft decision, which took no account of the Italian observations set out in the memorandum of 10 March 1990, was studied by the EAGGF committee on the following 20 March. Since the Commission considered that the observations of the Italian Government were insufficient, it did not amend the Further Report. The Commission notes that, according to the case-law of the Court, it is accepted that decisions on the clearance of accounts do not require a formal statement of reasons in so far as national administrations are closely associated with the process of drawing up the decision. Furthermore, it categorically denies that it was required to continue discussions after the period set by the Decision of 15 November 1989 on the clearance of accounts, or to respond to the memorandum of 10 March 1990. Such a claim is contrary to the procedure for clearing the accounts. Article 1(3) of Regulation No 1723/72, inserted by Commission Regulation (EEC) No 422/86 of 25 February 1986 (Official Journal 1986 L 48, p. 31), provides that the Commission may fix a deadline for Member States to forward additional information. The Commission points out that the Court, in its judgment in Joined Cases 258, 337 and 338/87 Italy v Commission [1989] ECR 3359, took account of that provision, without requiring that the forwarding of additional information should continue to be the subject of discussions. If setting a time-limit without the need for any subsequent discussions is justified under the normal clearance procedure, it is all the more so when discussions are already in progress as a result of which expenditure is being disjoined in order to enable the Member Sute to submit additional information. As to the second plea, the Commission observes that the fundamental problem lies in setting up a system of ‘thorough’ scrutiny. According to the Community rules, that requires, in the first place, an examination of the overall dau relating to initial stocks, final stocks, the use of raw materials and the sale of the finished products in order to ascertain the reliability of the particular book records. So far as concerns that aspect, in its telex of 10 October 1989 the EAGGF had expressly asked for three checks to be carried out: (a) a comparison between the undertakings' particular book records, stock records and accounts (comparison of initial stock figures and final stock figures with the stock records; checking alignment of the particular book records and the general records as to quantities of raw materials, quantities of materials used and quantities sold); (b) a comparison between the figures in the annual report and the particular book records; (c) a comparison between stocks of raw materials, current output and stocks of finished products. However, in the view of the Commission, the file forwarded by the Iulian authorities contains no evidence that those overall checks were carried out. Scrutiny of isolated transactions cannot guarantee that the total quantities of skimmed-milk powder for which aid was granted were used in accordance with Community rules. Furthermore, the particular book records should have been checked by checking samples of individual transactions. Such a check covers purchases of raw materials (to ascertain whether any substite products were bought), the manufacture of feedingstuffs (manufacturing records, conformity of analyses with the manufacturing formula) and sales of cattle feedingstuffs (invoices, transport documents, type of purchaser). According to the Commission, the file contains no information suggesting that scrutiny covered those aspects. Moreover, administrative scrutiny should have been supplemented by a direct inspection of stocks. The Commission considers that the file contains no information as to that type of inspection. The Commission concludes that the file forwarded by the Italian authorities contains no evidence of an overall comparison between the particular book records and the accounts and that accordingly the checks carried out did not amount to ‘thorough scrutiny’ within the meaning of the Community rules. It adds further that, in its judgment in Case C-8/88 Germany v Commission [1990] ECR I-2321, the Court confirmed that a Member State may not simply claim that checks were in fact carried out when there is no written record of them. In the same judgment, the Court held that, even if the Community rules do not impose on Member States specific rules as to inspection, they nevertheless entail the obligation to establish a consistent set of measures to be implemented by the officials entrusted with on-the-spot inspections, without which subsequent supervision by the Commission would be rendered impossible. The Commission also confirms the deficiencies and lacunae already mentioned in the Further Report. So far as concerns the manufacturing records, it observes that, being commercial documents within the meaning of Article 10(1 )(d) of Regulation No 1725/79, they should have been scrutinized during the quarterly inspections in 1987. Accordingly, die Italian authorities are relying on their own deficiency. The Commission adds that the Italian observations concerning the sale by Wessanen do not prove that processing in fact took place. So far as concerns the plea founded on the absence of a legal basis for the flat-rate reduction, the Commission claims that the deficiencies are such as to cast doubt on whether 100% of the sums in question is chargeable. It is only for reasons of equity that it fell back on a flat-rate reduction of 10% which gives the Member State concerned the benefit of the doubt.

2. Expenditure Telatine to aid Jot the consumption of olive ou (paragraph 4.4 of the Further Report)

20. According to the Further Report, a toul of LIT 4352012388 in respect of aid improperly granted is in the process of being recovered. The securities relating to that amount should have been forfeited and credited to the EAGGF.

21. The Italian Republic pleads infringement and misapplication of Article 8 of Council Regulation No 729/70 of 21 April 1970, and failure to state reasons in connection with Articles I, 3 and 5 of the same regulation, Article 8 of Commission Regulation No 1723/72 of 26 July 1972 and the Community provisions governing aid for the consumption of olive oil.

22. First, Italy claims that the securities could not be forfeited since it is still not possible to establish definitively whether or not the aid was in fact payable. The sums concerned represent the total amount of aid which the authorities declared unlawful. Those declarations are however disputed by the parties. It is accordingly for the Court to rule definitively on whether there was an irregularity. Consequently, charging to the EAGGF cannot be definitively disallowed. Secondly, Italy claims that it was not possible to forfeit the securities at the time the irregularities were noted since the period in which the securities were valid had expired. Given that the Commission has accepted the lateness of the checks because of die exceptional nature of the situation in Italy, it cannot subsequently refuse to charge the expenditure to the EAGGF because the guarantee has been lost after the time-limit for the checks has expired.

23. The Commission contends that in circumstances such as those of this case the aid is paid out in advance and the check on whether it qualifies is carried out subsequently. Referring to Article 29 of Regulation No 2220/85, the Commission points out that, when the inspectorate finds that aid has been improperly granted, the security must be forfeited without waiting for the outcome of the legal proceedings. As to Italy's argument that it was no longer possible to forfeit the securities by the time the irregularities had been established, the Commission observes that Article 11(3) of Regulation (EEC) No 2677/85 provides that the security is not to be released until after entitlement to the aid has been recognized.

P. J. G. Kapteyn

Judge-Rapporteur

1 Language of iht case: Italian.