Report for the Hearing in Case C-16/91

I — Legal background

According to Article 1(2) of Council Regulation (EEC) No 2473/86 of 24 July 1986 on outward processing relief arrangements and the standard exchange system (OJ 1986 L 212, p. 1):

‘Outward processing relief arrangements shall, under the conditions laid down by this regulation ..., allow Community goods to be temporarily exported from the customs territory of the Community in order to undergo processing operations, and the compensating products resulting from these operations to be released for free circulation in the customs territory of the Community with total or partial relief from import duties.’

Article 13(1) stipulates in this regard that:

‘The total or partial relief from import duties provided for in Article 1(2) shall be effected by deducting from the amount of import duties applicable to the compensating products released for free circulation the amount of import duties that would be applicable to the temporary export goods if they were imported into the customs territory of the Community from the country in which they underwent the processing operation or last such operation.’

For that purpose, Article 13(2) provides as follows:

‘The amount to be deducted pursuant to paragraph 1 shall be calculated on the basis of the quantity and nature of those goods on the date of acceptance of the declaration of their being placed under outward processing relief arrangements and on the basis of the other details of taxation applicable to them on the date of acceptance of the declaration of release for free circulation of the compensating products. The value of the temporary export goods shall be that taken into consideration for those goods in accordance with Article 8(1)(b)(i) of Council Regulation (EEC) No 1224/80 as last amended by Regulation (EEC) No 1055/85 when determining the customs value of the compensating products or, if the value cannot be determined in this way, the difference between the customs value of the compensating products and the processing costs determined by reasonable means.’

II — The dispute in the main proceedings and the reference for a preliminary ruling

Wacker Werke exports petrol engines and diesel engines to the United States of America under the outward processing relief arrangements. It imports from the United States, also under the outward processing relief arrangements, equipment (vibration plates, vibro-compacters and hydraulic pumps) in which the said engines are incorporated; that equipment is manufactured by the Wacker Corporation, an undertaking with which Wacker Werke has financial links.

When exporting, Wacker Werke sells its engines (temporary export goods) to Wacker Corporation. Its selling prices are calculated in the case of petrol engines, which it manufactures itself, on the basis of manufacturing costs plus a supplement of 25% for general expenses and profits and in the case of diesel engines, which it purchases from other German enterprises, on the basis of the purchase price plus 5%. When importing, it purchases the equipment (compensating products) from Wacker Corporation at the prices shown in the price lists of that company less a reduction of 45%. According to the national court, there is nothing to indicate that the prices invoiced for the temporary export goods and for the compensating products are influenced by the links existing between the two companies.

In completing the customs formalities for the compensating products imported between February 1986 and December 1988, the Hauptzollamt München-West (Main Customs Office for West Munich, hereinafter ‘the Hauptzollamt’) initially used the prices that the two undertakings had invoiced to one another in order to determine the customs value of the compensating products and the temporary export goods.

Subsequently, however, the Hauptzollamt considered that whereas the compensating products should be assessed on the basis of the invoiced selling prices, the temporary export goods should be assessed on the basis of the cost of manufacture (petrol engines) or the purchase price (diesel engines), in other words excluding the supplements of 25% or 5% invoiced by Wacker Werke to Wacker Corporation. Accordingly, it took steps for the a posteriori recovery from Wacker Werke of DM 36057.20 in respect of customs duty.

Wacker Werke, which considered that the calculation method initially used by the Hauptzollamt was the correct one, objected. When its objection was rejected, it appealed against this decision to the Finanzgericht München (Finance Court, Munich). In support of its application, it maintained that as the engines had been supplied for valuable consideration Article 8(1)(b)(i) of Council Regulation (EEC) No 1224/80 of 28 May 1980 on the valuation of goods for customs purposes (OJ 1980 L 134, p. 1), which stipulates that the ‘value’ of ‘materials, components, parts and similar items incorporated in the imported goods’ should be taken into account, could not be applied to determine the value of the goods before outward processing because, as its wording indicated, this provision related only to cases in which the said materials and components had been supplied ‘free of charge’. According to Wacker Werke, in order to arrive at the cost of processing it was necessary to subtract the selling price of the temporary export goods from the purchase price of the compensating products.

It appears from the order for reference that import duties on temporary export goods amount to 5.8% and 6.9%, while those on compensating products are only 4% and 4.1%.

It is in this context that the Finanzgericht, by order of 20 December 1992, decided to stay the proceedings and to refer the following three questions to the Court for a preliminary ruling:

‘1. Must Article 13(1) of Council Regulation No 2473/86 of 24 July 1986 on outward processing relief arrangements and the standard exchange system (OJ 1986 L 212, p. 1) be interpreted as meaning that for the calculation of import duty the customs value of the compensating products and of the temporary export goods must in principle be based on their transaction value in accordance with Article 3(1) of Council Regulation (EEC) No 1224/80 of 28 May 1980 on the valuation of goods for customs purposes (OJ 1980 L 134, p. 1), as last amended by Council Regulation (EEC) No 1055/85 of 23 April 1985 (OJ 1985 L 112, p. 50)? 2. If the answer to the first question is in the negative, must the first alternative provided for in the second subparagraph of Article 13(2) of Regulation No 2473/86 be interpreted as meaning that the customs value of the compensating products is to be determined in accordance with this provision even where the holder of the outward processing authorization has temporarily exported goods neither free of charge nor at reduced cost within the meaning of Article 8(1)(b)(i) of Regulation No 1224/80? 3. If the answer to the second question is in the affirmative, must Article 8(1)(b)(i) of Regulation No 1224/80 be interpreted as meaning that in order to determine the value of the products mentioned in that provision which have been manufactured by the holder of the outward processing authorization himself only manufacturing costs are to be taken into account and that the transaction value is to be adjusted for the general expenses and profit margin included in the selling price of those products? If so, in order to determine the value of the compensating products, is their transaction value also to be adjusted for cost components forming part of the value of the temporary export goods to the extent that they are included in the transaction value of the compensating products?’

III — Procedure before the Court

The order for reference was received at the Court Registry on 18 January 1991.

Pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted on 16 April 1991 by the German Government, represented by Messrs E. Roder and J. Karl, acting as Agents, and on 22 April 1991 by the Commission of the European Communities, represented by B. Rodriguez, of its Legal Service, and by R. Hayder, a German official seconded to the Legal Service of the Commission, acting as Agents.

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.

By a decision of 22 October 1991, taken pursuant to Article 95(1) and (2) of the Rules of Procedure, the Court assigned the case to the First Chamber.

IV — Summary of the written observations submitted to the Court

First question

The Commission and the German Government agree in recognizing that the first question aims to establish which provisions are applicable for determining the value of the compensating products and the temporary export goods.

The German Government points out that Article 13(1) of Regulation No 2473/86, which is unconnected with matters regarding customs value, merely indicates the method of calculating total or partial relief from import duty under the outward processing relief arrangements.

According to this provision, after talcing as a basis the amount of import duty that would normally be applicable to the compensating products in the absence of outward processing (amount A), it is necessary to determine the ‘notional’ amount of import duty that would be applicable to the temporary export goods if they were imported into the Community in their initial state from the country in which they underwent processing (amount B). Amount B is deducted from amount A. The difference is the amount of import duty applicable in the event of outward processing. Full relief is granted if the amount of the difference is not positive.

In the opinion of the German Government, the question of the calculation of the respective amounts and the determination of the customs value is dealt with in other provisions.

The customs value applicable for determining amount A stems directly from Regulation No 1224/80 on the valuation of goods for customs purposes in so far as the compensating products are imported goods within the meaning of Article 2 of that regulation, the customs value of which must in principle first be calculated by reference to the transaction value in accordance with Article 3, that is to say by reference to the price actually paid or payable after adjustment in accordance with Article 8.

As far as amount B is concerned, according to the German Government, customs value cannot be determined by application of Regulation No 1224/80, given that the temporary export goods, as their name indicates, are not imported goods within the meaning of the said regulation despite the fiction of importation contained in Article 13(1) of Regulation No 2473/86. The valuation of temporary export goods or, in other words, of inputs is dealt with separately in Article 13(2) of that regulation, and especially in its second subparagraph, where it is significant that mention is made not of a valuation criterion termed ‘customs value’ but only of the ‘value of the temporary export goods’.

The Commission observes by way of introduction that, judging from the wording of the question and the grounds set out in the order for reference, the national court is inclined to consider that the theoretical import duty on compensating products and the notional import duty on temporary export goods should be calculated on the basis of the customs value, as defined in Regulation No 1224/80. In this regard, the national court considers in particular Article 3(1) of that regulation, which bases the customs value of the imported goods on their transaction value, to be the determining provision.

In the opinion of the Commission, that analysis is correct as far as calculation of the import duty on compensating products is concerned, even though Regulation No 2473/86 does not expressly state this. The Commission notes in this regard that as Article 13(1) of Regulation No 2473/86 lays down that compensating products are ‘released for free circulation’, it follows that the general provisions of Regulation No 1224/80 relating to customs value necessarily apply. Moreover, the reference in the second subparagraph of Article 13(2) of Regulation No 2473/86 to the determination of the customs value of the compensating products in accordance with Article 8(1)(b)(i) of Regulation No 1224/80 logically implies that Article 3 of the latter regulation applies to the compensating products and that their customs value is determined by reference to the transaction value in accordance with Article 3.

The Commission cannot, however, endorse the reasoning of the national court as regards the notional determination of the import duty applicable to the temporary export goods. In its view, there is no need to take a ‘customs value’ in order to calculate the notional customs duty on those goods, as indicated, in accordance with the logic of the system, by the second subparagraph of Article 13(2) of Regulation No 2473/86, which deals with the ‘value of the temporary export goods’.

According to the Commission, therefore, it is not a question of directly applying the provisions of Regulation No 1224/80 on the valuation of goods for customs purposes in order to calculate the import duty or the value of temporary export goods. At most, those provisions may be used indirectly for calculating the value of the said goods in the event of recourse to the first alternative provided for in the second subparagraph of Article 13(2) of Regulation No 2473/86 in order to determine the customs value of the compensating products and on the assumption that in this context the transaction value is adjusted in accordance with Article 8(1)(b)(i) of Regulation No 1224/80.

The second and third questions

According to the German Government, the second question as worded calls for a negative reply in that the second subparagraph of Article 13(2) of Regulation No 2473/86, which governs not the customs value of the compensating products but the value of the temporary export goods, is not relevant for determining the customs value of the compensating products.

It considers that, in the light of the grounds set out in the order for reference, this question should be interpreted as seeking to establish whether the first alternative provided for in the second subparagraph of Article 13(2) of Regulation No 2473/86 is applicable in determining the value of the temporary export goods even when, at the time of determining the customs value of the compensating products, the price actually paid or payable has not been adjusted in accordance with Article 8(1)(b)(i) of Regulation No 1224/80 because the ‘holder of the outward processing authorization has not temporarily exported goods free of charge or at reduced cost within the meaning of Article 8(1)(b)(i) of Regulation No 1224/80’.

In that situation where, leaving aside other adjustments, the customs value of the compensating products corresponds to the price invoiced by the processor to the importer who had previously sold him the temporary export goods without an adjustment within the meaning of Article 8(1)(b)(i) of Regulation No 1224/80 having been made, the value of the temporary export goods must be determined in accordance with the second method of calculation described in the second subparagraph of Article 13(2) of Regulation No 2473/86, in other words it must be based on ‘the difference between the customs value of the compensating products and the processing costs’ and not in accordance with the first method of calculation, given that the customs value of the compensating products has been determined without recourse to Article 8(1)(b)(i) of Regulation No 1224/80.

In the view of the Commission, the second question, which relates essentially to the application of Article 8(1)(b)(i) of Regulation No 1224/80, also calls for a negative reply.

According to the Commission, when adjustment of the transaction value of the compensating products established in accordance with Article 3 of Regulation No 1224/80 to take account of goods supplied free of charge by the Community undertaking in inapplicable because the goods have been sold, as is the case in the situation to which the dispute in the main proceedings relates, it is the second alternative provided for in the second subparagraph of Article 13(2) of Regulation No 2473/86 that should be used.

The Commission notes in this regard that the reference to Article 8(1)(b)(i) of Regulation No 1224/80 contained in the first alternative set out in the second subparagraph of Article 13(2) of Regulation No 2473/86 reflects the customary trading relationship between Community undertakings and third country processing undertakings in the context of the outward processing relief arrangements. Temporary export goods are normally supplied to the processing undertaking free of charge. From the customs point of view, it is therefore necessary, in order to determine the customs value of the compensating products imported into the Community after processing, to add to the customs transaction value of the compensating products, calculated in accordance with Article 3 of Regulation No 1224/80, the value of the temporary export goods supplied free of charge. That is the only way of obtaining the total value of the compensating products. In accordance with the spirit and purpose of Article 8(1)(b)(i) of Regulation No 1224/80, such an addition is possible only when the exported goods have been supplied free of charge or at reduced cost and when, under the terms of that provision, their value is not already included in the price actually paid or payable for the imported compensating products.

The Commission holds that application of Article 8(1)(b)(i) of Regulation No 1224/80 by analogy would be contrary to the scheme of the second subparagraph of Article 13(2) of Regulation No 2473/86 and to the intention of the Community legislature because it would render superfluous the second possibility set out in the alternative in the latter provision.

According to the German Government and the Commission, since the second question should be answered in the negative, the third question is devoid of purpose.

Both consider, however, that the questions put to the Court do not exhaust all the legal issues arising in the case as regards the application and interpretation of the second alternative provided for in the second subparagraph of Article 13(2) of Regulation No 2473/86, according to which ‘the value of the temporary export goods shall be ... the difference between the customs value of the compensating products and the processing costs determined by reasonable means’. The question of substance relates to the method of determining by reasonable means the processing costs to be deducted from the customs value of the compensating products.

The German Government notes in this regard that, according to the Finanzgericht and the applicant, the only reasonable means would be to consider the difference between the purchase price of the compensating products and the necessarily lower purchase price of the temporary export goods as processing costs.

It maintains that, given the particular circumstances of the case, this would not be a reasonable means of calculation in that the difference between the two prices alone is unlikely to reflect the real processing costs in the United States. It points out in this regard first that the selling prices charged by Wacker Werke included general expenses and profit margins of between 5 and 25% and reductions of 45% on the repurchase price, secondly that Wacker Werke and the processor are related as parent company and subsidiary, and thirdly that the duty applicable to the compensating products (4 and 4.1%) is lower than that applicable to the temporary export goods (5.8 and 6.9%), which is unusual. According to the German Government, all of these factors suggest a deliberate intention to set as high a value as possible for the temporary export goods in order to keep the differential duty payable at a moderate level.

In the opinion of the German Government, this analysis is supported by the fact that if Wacker Werke had supplied the temporary export goods to the foreign processor free of charge instead of selling them, the foreign processor would have been able to invoice only the processing charge. This would have been adjusted in accordance with Article 8(1)(b)(i) of Regulation No 1224/80 by reference to the value of inputs determined on the basis of objective data, that is to say in the case of the diesel engines the purchase price in Germany without any increment and in that of the petrol engines the cost of production without any increment for general expenses and profits, in accordance with the interpretative note regarding Article 8(1)(b)(ii)(2) in the annex to Commission Regulation (EEC) No 1494/80 of 11 June 1980 on interpretative notes and generally accepted accounting principles for the purposes of customs value (OJ 1980 L 154, p. 3). As a result, the value of the inputs would have been taken into account in calculating the duty, with the result that Wacker Werke would have had to pay the disputed sum of DM 36057.20.

In the view of the German Government, this outcome would accord with the spirit and purpose of the outward processing relief arrangements, namely to tax in an economically neutral manner the actual added value that the Community goods acquire in the third country and thus to guarantee the necessary protection for the essential interests of Community processors. The German Government notes that it is quite clear from Article 6 of Regulation No 2473/86, which makes the grant of the outward processing relief arrangements subject to the existence of certain economic conditions, that for the collection of the differential duty after inward processing it is not considerations regarding the customs value (to improve and facilitate international trade, for example) that prevail but the desire to safeguard the interests of Community producers.

According to the German Government, means can be reasonable only if the resulting value, that is to say the difference between the customs value of the compensating products and the processing costs, ultimately corresponds approximately to the objective data in the form of the purchase price and the production costs of the inputs respectively (first alternative in the second subparagraph of Article 13(2) of Regulation No 2473/86).

In conclusion, the German Government considers that the answer to the second question should be supplemented by stating that the means chosen by the customs authorities to determine the processing costs are reasonable within the meaning of the second alternative in the second subparagraph of Article 13(2) of Regulation No 2473/86 if the resultant value of the temporary export goods corresponds approximately to their purchase price or production costs.

According to the Commission, a relevant method of determining processing costs within the meaning of the second alternative in the second subparagraph of Article 13(2) of Regulation No 2473/86 may consist in subtracting the processing undertaking's expenses for the temporary export goods from its total expenses, which are reflected in the selling price of the compensating products and in their customs value.

In this regard, the Commission points out that the processing undertaking's expenses for the purchase of the temporary export goods for valuable consideration are not in fact processing costs, as the goods in question are the ones subjected to processing.

In concrete terms, this interpretation of the second alternative provided for in the second subparagraph of Article 13(2) of Regulation No 2473/86 means that the processing costs for the compensating products supplied by Wacker Corporation would correspond to their actual selling price taken into account in the customs value less the amounts paid by Wacker Corporation for the supply of the engines, which amounts include the increments applied by Wacker Werke as general expenses and/or profit margins. In this way the amount to be used to determine the value of the temporary export goods would correspond to the purchase price of the engines purchased by Wacker Corporation.

D. A. O. Edward

Judge-Rapporteur

1 Language of the case: German.