Report for the Hearing in Case C-55/91

I — Relevant legislation

1. The basic provision on the financing of the common agricultural policy is Regulation (EEC) No 729/70 of 21 April 1970 (OJ, English Special Edition 1970(1), p. 218). Article 1 of that regulation gives the European Agricultural Guidance and Guarantee Fund (hereinafter ‘the EAGGF’) the task of financing refunds on exports to third countries and intervention intended to stabilize the agricultural markets. Under Article 3 of the regulation, such intervention must be Article 4 provides that Member States are to designate the authorities and bodies which they are to empower to pay sums due in respect of intervention and that the Commission is to make available to Member States the necessary credits in order to enable those authorities and bodies to make the payments. In any event, Member States must ensure that those credits are used without delay and solely for the purposes laid down. Pursuant to Article 5(2)(b) of that regulation, the Commission is to make up the annual accounts of those national authorities and bodies. Article 8 provides as follows: Under Article 9, Member States are under a duty to take all suitable measures to facilitate the supervision which the Commission may consider it necessary to undertake. Article 9 further provides as follows:

‘undertaken according to Community rules within the framework of the common organization of agricultural markets’.

‘1. The Member States in accordance with national provisions laid down by law, regulation and administrative action shall take the measures necessary to: satisfy themselves that transactions financed by the Fund are actually carried out and are executed correctly; prevent and deal with irregularities; recover sums lost as a result of irregularities or negligence. ...

2. In the absence of total recovery, the financial consequences of irregularities or negligence shall be borne by the Community, with the exception of the consequences of irregularities or negligence attributable to administrative authorities or other bodies of the Member States.’

‘2. Without prejudice to the supervision effected by Member States ..., officials appointed by the Commission to carry out inspections on the spot shall have access to the books and all other documents relating to expenditure financed by the Fund. They may in particular check: (a) whether administrative practices are in accordance with Community rules; (b) whether the requisite supporting documents exist and tally with the transactions financed by the Fund; (c) the conditions under which transactions financed by the Fund are carried out and checked. The Commission shall give due notice before the inspection is carried out to the Member State concerned or to the Member State on whose territory it is to take place. Officials of the Member State concerned may take part in the inspection. At the request of the Commission and with the agreement of the Member State, inspections or inquiries concerning the transactions referred to in this Regulation shall be carried out by the competent authorities of that Member State. Officials of the Commission may also participate.’

2. Article 6 of Regulation (EEC) No 283/72 of the Council of 7 February 1972 concerning irregularities and the recovery of sums wrongly paid in connection with the financing of the common agricultural policy and the organization of an information system in this field (OJ, English Special Edition 1972(1), p. 90) provides as follows:

‘1. Where the Commission considers that irregularities or negligence have taken place in one or more Member States, it shall inform the Member State or States concerned thereof, and that State or those States shall hold an administrative inquiry in which servants of the Commission may take part. The Member State shall communicate to the Commission the report and the inquiry findings. If the Commission does not take part in the inquiry, it shall be kept informed of its progress by means of the quarterly communications provided for in Article 5.

2. Where the inquiry does not show that there has been an irregularity or negligence, the Fund Committee shall be informed of the results of the inquiry and where appropriate shall study its implications for the Community. The Member State in question shall then have one month in which to make known its final reasoned position in the light of the study made by the Fund Committee.

3. Where the inquiry shows that there has been an irregularity or negligence, or where this is accepted by the Member State concerned following the procedure referred to in paragraph 2, the Member State shall institute as rapidly as possible an administrative or judicial procedure to establish formally that there has been an irregularity or negligence. It shall keep the Commission informed of the progress of the procedure in accordance with Articles 3, 4 and 5.’

3. Regulation (EEC) No 1723/72 of the Commission of 26 July 1972 on making up accounts for the European Agricultural Guidance and Guarantee Fund, Guarantee Section (OJ, English Special Edition, Second Series, III. European Agricultural Guidance and Guarantee Fund, p. 109) sets out the procedure whereby the authorities and bodies empowered to pay the expenditure financed by the EAGGF are to be forwarded to the Commission. Article 8 of that regulation provides as follows:

‘The decision to make up the accounts mentioned in Article 5(2)(b) of Regulation (EEC) No 729/70 shall cover:

a) the determination of the amount of expenditure incurred in each Member State in the year in question, recognized as chargeable to the EAGGF, Guarantee Section;

...’.

4. As far as milk and milk products are concerned, Council Regulation (EEC) No 856/84 of 31 March 1984 amending Regulation (EEC) No 804/68 on the common organization of the market in milk and milk products (OJ 1984 L 90, p. 10) provided for an additional levy imposed on producers or purchasers of cows' milk with the aim of controlling the increase in milk production, whilst enabling the necessary changes and structural adjustments to take place, having regard to the diversity of national and regional situations. Article 5c(5) of Regulation 804/68, as inserted by Regulation No 856/84, provides as follows: ‘The levies referred to in this Article shall be regarded as intervention measures designed to regulate agricultural markets and shall be allocated to the financing of expenditure in the milk and milk products sector.’ For their part, Articles 15 and 16 of Commission Regulation (EEC) No 1546/88 of 3 June 1988 laying down detailed rules for the application of the additional levy referred to in Article 5c of Regulation (EEC) No 804/68 (OJ 1988 L 139, p. 12) are concerned with the statements having to be made by producers for control purposes. Specifically, Article 16(1) provides as follows:

‘Every producer of milk or milk products to whom Article 5c(2) of Regulation (EEC) No 804/68 applies shall, within two months of the end of each 12-month period, forward to the competent agency designated by the Member State a statement indicating the quantities of milk and/or milk products sold during that period and, at the request of the competent agency, during the reference calendar year.

This statement shall also cover sales of milk products produced on the farm to wholesalers, cheese curers or retailers.’

5. Council Regulation (EEC) No 1837/80 of 27 June 1980 on the common organization of the market in sheepmeat and goatmeat (OJ 1980 L 183, p. 1) provided for a premium for Italian farmers per head of lamb or kid not slaughtered before the age of two months to the extent necessary in order to offset their potential loss of income as a result of the introduction of the common organization of the market. Expenditure relating to such premiums is regarded as forming part of intervention intended to regularize the agricultural markets. Article 8 of Commission Regulation (EEC) No 3007/84 of 26 October 1984 laying down detailed rules for the application of the premium for producers of sheepmeat (OJ 1984 L 283, p. 28) provides as follows:

‘Member States shall take all necessary measures to ensure, should the need arise, the recovery, in whole or in part, of any premiums unduly paid. Amounts recovered shall be declared as deductions from EAGGF expenditure.’

6. Article 5 of Regulation (EEC) No 1467/70 of the Council of 20 July 1970 fixing certain general rules governing intervention on the market in raw tobacco (OJ, English Special Edition 1970(II), p. 497) provides that For its part, Article 6(2) of Regulation (EEC) No 1727/70 of the Commission of 25 August 1970 on intervention procedure for raw tobacco (OJ, English Special Edition 1970(II), p. 592) specifics that Annex III, together with Annex II, requires an assessment to be made of the colour, leaf texture, stage of development, maturity, damage, presence of foreign bodies, combustibility, flavour and aroma.

‘Only tobacco corresponding to the minimum quality characteristics to be defined on the basis of classification by variety and quality shall be bought in by the intervention agencies.’

‘Tobacco shall be considered as corresponding to minimum quality characteristics mentioned in Article 5 of Regulation (EEC) No 1467/70 if it does not have one or more of the characteristics listed in Annex III to this Regulation.’

7. Article 35 of Regulation No 136/66/EEC of the Council of 22 September 1966 on the establishment of a common organization of the market in oils and fats (OJ, English Special Edition 1965-1966, p. 221) provides as follows: The annex to the regulation refers to four classifications of virgin olive oil (‘extra’, ‘fine’, ‘ordinary’ and ‘lampante’) which depend on two criteria: the organoleptic characteristics of the product and its free fatty acid content expressed as oleic acid. For its part, Commission Regulation (EEC) No 1058/77 of 18 May 1977 on the characteristics of olive oil and of certain products containing olive oil and amending the Common Customs Tariff nomenclature as regards olive oil (OJ 1977 L 128, p. 6) specified the distinction between olive oils in terms of their physical and chemical characteristics. In addition, according to Article 2(5) of Commission Regulation (EEC) No 3472/85 of 10 December 1985 on the buying-in and storage of olive oil by intervention agencies (OJ 1985 L 333, p. 5), In that regard, the third and fourth subparagraphs of Article 3(2) provide as follows: Lastly, several Commission regulations provide for opening of a standing invitation to tender for olive oil held by the Italian intervention agency.

‘Without prejudice to the harmonization of legislation on olive oil for human consumption, Member States shall, for the purposes of intra-Community trade and trade with third countries, except in respect of exports to third countries, adopt the descriptions and definitions of olive oil set out in the Annex to this Regulation.’

‘In the case of virgin olive oil other than lampante, the offer may not be accepted until the intervention agency has checked that the organoleptic characteristics correspond to those defined in the Annex to Regulation No 136/66/EEC ...’

‘With regard to edible virgin olive oil, the examination of the organoleptic characteristics [is] carried out according to a Community procedure.

Until such a procedure is laid down, the Member States shall carry out the above examination in accordance with national procedures.’

8. According to Article 27(1) of Regulation No 136/66, The actual rules on the grant and implementation of that subsidy were specified in Council Regulation (EEC) No 1594/83 of 14 June 1983 on the subsidy for oil seeds (OJ 1983 L 163, p. 44) and Commission Regulation (EEC) No 2681/83 of 21 September 1983 laying down detailed rules for the application of the subsidy system for oil seeds (OJ 1983 L 266, p. 1). Specifically, aid for the production of soya beans was introduced by Council Regulation (EEC) No 1491/85 of 23 May 1985 laying down special measures in respect of soya beans (OJ 1985 L 151, p. 15) and Commission Regulation (EEC) No 2329/85 of 12 August 1985 laying down detailed rules for the application of the special measures for soya beans (OJ 1985 L 218, p. 16), under which aid may be paid only in respect of soya beans produced and processed in the Community. To that end, Article 6 of Council Regulation (EEC) No 2194/85 of 25 July 1985 adopting general rules concerning special measures for soya beans (OJ 1985 L 204, p. 1) requires Member States to set up a control system ensuring that only products entitled to aid receive it. In particular, a system for checking areas cultivated had to be set up. Likewise, Article 13(1) of Regulation No 2329/85 provides that the competent agency of the Member State has to verify that the particulars specified in Article 7 — relating in particular to identification of the area concerned — appear in contracts concluded between the producer and the first purchaser; the price to be paid to the producer is at least equal to the minimum price referred to in Article 2(2) of Regulation (EEC) No 1491/85, and the particulars specified in Article 9 are complete and, by means of random checks, that the quantities indicated in the delivery declarations could have been produced on the area indicated in the contract according to the established yields for that region. Article 13(2) provides for a scries of checks to be carried out at the first purchaser's and at the processor's. Lastly, additional control measures are covered by Article 26 et seq. of Commission Regulation (EEC) No 2537/89 of 8 August 1989 laying down detailed rules for the application of the special measures for soya beans (OJ 1989 L 245, p. 8).

‘Where the target price in force for a species of seed is higher than the world market price for that seed ..., a subsidy shall be granted for seed of that species harvested and processed within the Community ...’.

9. Article 10 of Regulation (EEC) No 2727/75 of the Council of 29 October 1975 on the common organization of the market in cereals (OJ 1975 L 281, p. 1) provides for an aid for durum wheat provided that the intervention price valid for the marketing centre of the area with the largest surplus is lower than the guaranteed minimum price. In that connection, Article 4 of Council Regulation (EEC) No 3103/76 of 16 December 1976 on aid for durum wheat (OJ 1976 L 351, p. 1) provides as follows: In addition, Article 5 of that regulation provides that: Lastly, Article 5 of Commission Regulation (EEC) No 2835/77 of 19 December 1977 laying down detailed rules with respect to aid for durum wheat (OJ 1977 L 327, p. 9) provides as follows:

‘1. Member States shall introduce a system of administrative supervision to ensure that a product for which aid is requested meets the requirements for granting such aid.

2. For the purposes of such supervision, Member States shall introduce a system of declarations relating to the areas cultivated and the seed varieties used. Such a declaration shall be equivalent to an application for aid.’

‘Member States shall carry out random on-the-spot checks to ascertain the accuracy of the declarations referred to in Article 4(2).’

‘The checks provided for in Article 5 of Regulation (EEC) No 3103/76 shall cover at least a representative percentage of the applications submitted, taking into account the geographical distribution of the areas concerned.

Such percentage shall not in any case be less than 5%.’

II — Facts and procedure

1. By letter reference SG (90) D/29931 dated 30 November 1990, which was received at the Italian Permanent Representation to the European Communities on 3 December 1990, the Commission of the European Communities notified to the Italian Government, pursuant to Article 191 of the EEC Treaty, Decision C (90) 2337 final of 30 November 1990 on the clearance of the accounts presented by the Member States in respect of the expenditure for 1988 of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund.

2. By that decision, after stating among other things (in the fifth recital in the preamble) that ‘pursuant to Articles 2 and 3 of Regulation (EEC) No 729/70, only refunds on exports to third countries and intervention to stabilize agricultural markets, respectively granted and undertaken according to Community rules within the framework of the common organization of the agricultural markets, may be financed; ... the inspections carried out show that a part of the expenditure declared by the Member States does not meet these conditions and therefore must be disallowed ... ’, the Commission decided not to charge to the Fund inter alia the following expenditure incurred by Italy: (1) LIT 83977318963 in respect of the co-responsibility levy in the milk and cheese sector, (2) LIT 67392655139 in respect of premiums for producers of sheepmeat and goatmeat, (3) LIT 711001829 +1554528324 in respect of intervention tobacco, (4) LIT 60808737217 in respect of intervention olive oil, (5) LIT 38034266760 in respect of processing aid for soya bean, and (6) LIT 67501305800 in respect of aid for the production of durum wheat.

3. The Italian Republic brought an action against that decision; its application was received at the Court Registry on 7 February 1991.

4. The applicant, the Italian Republic, claims that the Court should: 1. annul Commission Decision C (90) 2337 final of 30 November 1990 in so far as it held ineligible for charging to the EAGGF, in the course of the clearance of accounts presented by the Italian Republic in respect of expenditure in the 1988 financial year, the sum of LIT 319268813032; 2. order the Commission to pay the costs. The defendant, the Commission, claims that the Court should: 1. dismiss the application; 2. order the applicant to pay the costs.

III — Pleas and arguments of the parties

(a) Expenditure in respect of the co-responsibility levy in milk and cheese sector

1. The applicant contests the calculation set out in the third subparagraph of section 4.3.10.3.(a) of the summary report, according to which the Commission added to the 8702741600 kg given in ISTAT's monthly statistics as communicated to EUROSTAT an additional 103000000 kg to cover cheese deliveries to dairies not included in the ISTAT figures. It was precisely on the basis of those data that the Commission worked out that the national reference quantity had been exceeded by 183701600 kg and calculated the levy on the basis of that quantity. According to the applicant Government, the Commission added the extra 103000000 kg on the basis of a table drawn up informally in the context of disputes relating to preceding periods in which the milk quotas had been in force and updated on the occasion of a visit by EAGGF officials, to whom it had been explained, ever since the first version of that document, that the data given in it were not official and hence could not be used in the procedure in question. Moreover, that document had been drawn up solely because the EAGGF officials had insisted on it in order to obtain a better understanding of certain marketing channels typical of Italy, which were covered by larger aggregated figures in the ISTAT statistics. The applicant maintains that it follows that in this procedure the EAGGF aggregated the ISTAT statistics and the abovementioned informal estimates, hence compiling heterogeneous figures. Even if it were true, as the Commission claims, that the figures for cheese deliveries were aggregated using the same method as had been used for the 1987 financial year which had not been contested by the Italian authorities, that argument would be irrelevant since the calculation method for an earlier financial year (1987), which had not been contested at the time (which is possible on several grounds, without excluding a misrepresentation of the actual facts), could not be adopted sic et simpliciter for a subsequent financial year if that method had been contested for that financial year, as had been the case with the 1988 financial year.

2. The Commission, as defendant, argues that the calculation method in question had already been used by it and accepted by Italy on the occasion of the clearance of the accounts for the preceding financial year, when it was found that the quantity of cheese delivered to dairies was not included in the ISTAT data and therefore had to be added. In addition, on the occasion of the clearance of the accounts for the 1989 financial year, that is to say, the financial year after the one at issue, the Italian authorities had again accepted that the quantities of cheese delivered to dairies had to be added to the ISTAT figures, precisely on the basis of the figures set out in the table already used for the clearance of the accounts for the 1988 financial year. The Commission refers in this connection to a letter dated 18 April 1991 from the Italian authorities which, it maintains, proves that the quantities of cheese delivered to dairies had not been included in the ISTAT figures in the past and are still not included and therefore have to be added. Accordingly, the defendant has to base itself on other sources of information, in particular other available statistics, since Italy, in breach of Community law, does not apply the provisions relating to delivery statements, currently Articles 15 and 16 of Regulation (EEC) No 1546/88.

(b) Expenditure in respect of the premium for producers of sheepmeat and goatmeat

1. The applicant challenges the refusal to charge to the EAGGF the sum of LIT 2827359845 on account of late payment and LIT 67392655139 on account of controls which are regarded as being inadequate. It considers that to refuse to charge that expenditure seems neither lawful nor acceptable, since it is merely the outcome of sample checks carried out by Community officials in certain provinces in certain regions which are extrapolated to cover the whole of Italy by taking the average percentage of irregularities found and cover not only the regions in which the checks were carried out but others as well. Accordingly, the Commission's calculation may be described as based on false premises and without reason or justification, notwithstanding the fact that it appears to be based on a method. Essentially, the Commission's findings are based merely on — objectively uncertain — evidence, which in fact does not prove either that no controls were implemented or that the controls implemented were insufficient. Suffice it to consider, for example, the subjective nature of the criterion of weight, which varies from region to region, depending on the breed of the animal, its feeding and the weather. Yet, on the basis of this extremely dubious evidence, the Commission decided not to recognize any control which did not precisely satisfy the criteria laid down by it. In those circumstances, there seems to be very little justification for applying drastically a very significant reduction to the whole of the expenditure by extrapolating to the whole of Italy the percentage of inadequate controls found for certain farms, having regard to the fact that the Commission based its observations on data which are contested by the Italian authorities and on which it is possible to have different views given the diversity of local situations. Such a serious financial correction — made not on account of irregularities found in payments but solely on account of alleged defective controls — ought to have had a much more substantial and significant basis.

2. The Commission considers in the first place that this plea relates to the definitive refusal to charge to the EAGGF the sum of LIT 53438771788 corresponding to the expenditure declared by Italy in respect of premiums for producers of sheepmeat and goatmeat in the seven regions in which the checks were carried out. In contrast, the provisional refusal to charge to the EAGGF LIT 130000000000 corresponding to the expenditure declared by Italy in respect of the regions in which checks were not carried out is not covered by these proceedings, since a review procedure is pending. Specifically as regards the checks carried out, the Commission argues that the inspections certainly did not constitute sporadic checks carried out in certain regions but were effected in the most important provinces of the most important regions. The EAGGF inspectors visited the four regions accounting for 68% of aggregate declared expenditure (Sicily, Calabria, Sardinia and Tuscany) and did not investigate the files and documentary evidence relating only to those regions, but also those of three others (Piedmont, the Marches and Apulia), which accounted for 9% of the aggregate declared expenditure. Since, consequently, the application of the relevant system in Italy was checked both by scrutinizing on the spot the role played by the various agencies and by crosschecking various files and documents, the applicant's claim that the investigation did not reveal either that there were no controls or that the controls carried out were insufficient is surprising. Apart from the fact that it did in fact undercover actual irregularities in particular cases, the Commission points out an inspection carried out in connection with the clearance of accounts is not designed to uncover individual cases of fraud or irregularity. As the Court has held, it is not the Commission's task to check the propriety of each intervention measure, since Article 8(1) of Regulation No 729/70 provides that it is for the Member States to satisfy themselves that transactions financed by the EAGGF are actually carried out and are executed correctly. For its part, the Commission is entitled to exercise the supervisory power conferred on it by Article 9 of Regulation No 729/70 in order to check on the effectiveness of national controls. As for the extrapolation of the findings made in the inspections to cover each of the regions checked, the Commission points out that the checks carried out by the EAGGF, which are based on consistent, confirmed practice, consisted in: (a) examining the procedures and implementation methods adopted by the regions checked; (b) identifying their shortcomings and inadequacies; and (c) crosschecking various files in order to confirm and assess the existence of such shortcomings. The Commission refers to the fact that the Court has consistently held with regard to the burden of proof in procedures for the clearance of accounts that the Commission has to prove the existence of an infringement of the rules of the common organization of the markets, whilst the Member State taking issue has to show that the Commission made errors as to the resulting financial consequences.

(c) Expenditure in respect of tobacco offered for intervention

1. The applicant contests the manner in which the Commission carried out quantitative inspections in the stores for intervention tobacco and took what it maintains to be representative samples of each lot, resulting in two financial corrections to Italy's disadvantage of LIT 711001824 and 1554528324 respectively. Those corrections are based on samples taken and analysed by Commission officials, despite objections from the national administration. Since in its judgment in Case C-366/88 France v Commission [1990] ECR I-3571 the Court held that it follows from the supervisory system introduced by Article 9 of Regulation No 729/90 that, if the taking and analysis of samples prove necessary, those operations must be carried out by the Member State pursuant to the third paragraph of Article 9(2), the inspection carried out by the Commission was contrary to the Community rules and the decision adopted ought to be annulled, if only on that ground. In addition, the Italian bodies repeatedly contested — raising abundant arguments, which were not adequately refuted — the control methods, the manner in which the inspection was carried out and the action which the Commission intended to take and actually took, with the result that, in parallel and in the alternative, the decision also appears unacceptable from this point of view. Lastly, the applicant maintains that, during the inspection carried out in January 1990, the Commission officials themselves certified that they had not found any shortcomings in the control system.

2. The Commission starts by stating that, during the inspection carried out between 7 and 15 February 1988, the Commission delegation was — with the agreement of AIMA (the Italian intervention agency) — accompanied on all visits to storage sites by AIMA representatives who were experts on tobacco, and that, during those visits, the AIAM representatives made no objection in the various minutes about the procedure, the method or the results of the checks carried out. As for the minutes of the meeting held in January, the Commission points out that they were contested immediately. It follows that in those two cases it is incorrect to claim that the inspections were carried out and samples taken ‘despite objections from the national administration ’. It is also wrong to claim that the Commission never adequately refuted the arguments raised in this connection by the Italian authorities. On the contrary, the observations made by the Italian authorities were taken into account in a large measure by the Commission, including those relating to the natural ageing of the tobacco and the carriage of the samples. The only quantities which had been definitively disqualified consisted solely of leaf which should never have been accepted for intervention since it did not satisfy the minimum quality characteristics set out in Annex III to Regulation No 1727/70, as the Italian authorities themselves acknowledged. As far as the judgment in Case C-366/88 France v Commission is concerned, the Commission considers that it is not applicable in this case. In its view, in that judgment the Court annulled internal instructions relating to the taking and analysis of samples on the ground that the Commission had no power to impose obligations on third parties in receipt of funds from the EAGGF. In contrast, although the judgment was couched in fairly general terms, it was not concerned with direct relations between the Commission and the Member States in connection with inspections of products bought into intervention. According to the Commission, Article 9 of Regulation (EEC) No 729/70 constitutes a sufficient legal basis for the taking and analysis of samples by the Commission, as was held in the judgment in Case 214/86 Greece v Commission [1989] ECR 367 (summary publication only).

(d) Expenditure in respect of olive oil taken into intervention

1. The applicant points out first that, as far as this plea is concerned, there are two separate points at issue: (a) a Commission inquiry into the quality and origin of virgin olive oils from the 1987/88 marketing year taken into intervention in Italy, following which the Commission considered that it could not finance ‘the purchase (and related costs) of all oils from the 1987/88 marketing year (intervention in 1988) in the stores sampled apart from ... 300.7 tonnes ...’, since the oil was of lower quality than it was initially declared to be of, resulting in a financial correction to Italy's disadvantage of LIT 34172079373, and (b) a further inquiry (the ‘ASSITOL inquiry ’) covering oils from the 1983-1984 and subsequent marketing years, from which it appeared that the olive oil bought into intervention contained olive residue oil or had deteriorated through poor storage, resulted in an additional financial correction to Italy's disadvantage of LIT 5692345965 + 2025495419 + 18918816460. As far as point (a) is concerned, the Italian Government observes that at the time when it had submitted its written observations, Joined Cases C-161/90 and C-162/90 Petruzzi and Longo, concerning precisely the legality of analyses carried out by the Commission, were still pending before the Court; consequently, as the proceedings stand, it confines itself to claiming that the decision should be annulled as regards point (a), pending the judgment of the Court. As far as point (b) is concerned, the applicant observes that the alleged anomalies were found by the Commission on the basis of samples taken and analyses carried out by the Commission itself, despite the objections of the national administration; from this point of view, the issue is similar to that raised in the preceding plea relating to tobacco. In accordance with the judgment in Case C-366/88 France v Commission, the Commission's inspection was illegal. It follows that the expenditure must be charged to the EAGGF. Entirely in the alternative, it reiterates the views which it had already expressed at the time of the inspection and of the clearance of the accounts to the effect that: (a) the national inspections had been carried out in accordance with the Community provisions in force at the time by duly authorized laboratories and had not produced negative results; (b) thc Commission took account of inspections carried out by ASSITOL, a private association (which perhaps had an interest in not validating the products of the national intervention agency), while contesting the findings made in national public inspections without reason; (c) the sound quality of the products, which the Commission denies, has consistently been borne out by the prices obtained on the market and by inspections carried out by customs laboratories upon exportation (on a large proportion of the products).

2. As far as the oil from the 1987/1988 marketing year is concerned, the Commission argues that the financial correction in question had been challenged by the applicant on a precautionary basis pending the judgment of the Court in Joined Cases C-161/90 and C-162/90 Petruzzi and Longo. Since the Commission's views set out in the defence remained the same, the question seemed to be otiose having regard to the judgment of 10 October 1991, which confirmed the legality of the analyses carried out. As for the inquiry into oils from the 1983/1984 and subsequent marketing years, the defendant states that it was initiated following a complaint from ASSITOL (Italian Association of the Oils Industry) to the effect that lots of lampante virgin olive oil which had been in intervention storage and put up for sale at the standing tender of lots taken into intervention were not in conformity with the Community rules. It stresses, first, that the Commission's inquiry was separate and independent from that carried out by ASSITOL and, secondly, that the Italian authorities had been informed in due time both of the analyses carried out and of the laboratories responsible; the Commission had sought and obtained the agreement of the Italian authorities before having samples taken on its behalf by a private company. As for the alleged illegality of the operation by which the samples had been taken in the light of the judgment in Case C-366/88 France v Commission, the defendant refers to that which it has argued with regard to tobacco. As to the substance, the defendant points out that the analyses were carried out by two recognized, independent laboratories (the SSOG company of Milan and the Wolf de Clichy laboratory), which found that 65.3% of the 17200 tonnes checked did not tally with the qualities declared. Consequently, it had rightly been decided not to charge the expenditure in respect of the oil concerned to the EAGGF.

(e) Expenditure in respect of aid for the processing of soya beans

1. The applicant regards it as absolutely unacceptable that the Commission should have used as its yardstick an inquiry made at the material time into 400 farms, which allegedly revealed the ‘inadequacy of control measures in ... critical areas’ of the sector of aid for the production of soya beans, and that it had therefore considered it necessary to make a flat-rate 5% deduction from the amount of expenditure incurred by Italy for the 1988 financial year of LIT 760 billion, resulting in its refusal to charge to the EAGGF the sum of LIT 38034266760. It points out in this connection that the Commission's inquiry originally related to the total amount of aid, not only for the 1988 financial year, but also for the preceding three financial years, amounting on aggregate to some LIT 1727 billion, and that, since the Italian authorities resolutely opposed the Commission's position, the Commission reduced the financial correction from LIT 1727 to 38 billion by excluding the 1985 to 1987 financial years and limiting it to 5% for 1988. Despite this very large ‘reduction’, the Italian Government resolutely contests the refusal to charge the sum of LIT 38 billion to the EAGGF. In its view, the Commission's accusations alleging lack of supervision — that is to say, inadequate, not totally absent, supervision — is not underpinned by any specific evidence. It stresses that the Commission itself does not hide the fact that its attitude is based on a ‘general impression’ resulting from the inspection. But that ‘impression’ cannot serve as the basis for a correction involving such serious financial consequences for a State, especially since no substantial irregularity was uncovered in this case. The applicant does not ignore that the Italian authorities admitted that there were problems with regard to controls; it none the less argues that it is equally true that those problems (which arise moreover in every sphere where the subject-matter is vast, complex and fragmented) are also due to the inadequacy of the Community legislation, in so far as it was in the wake of the actual inquiries at issue that the Commission rapidly adjusted the rules on the production of soya in the form of Regulation No 2537/89 to suit the actual situation. It follows that the Commission's general conclusion relating to the ‘inadequacy of [Italian] control measures in ... crucial areas’ is unacceptable, since it is based on no specific evidence; the seriousness of the consequences means that a reduction which is more akin to a sanction — which the Commission certainly has no power to impose — than to a correction cannot be applied so casually. Moreover, no grounds have been stated for the correction, bearing in mind that the Commission's findings were contested in detail by the Italian authorities. It must therefore be considered that the financial correction calculated on a flat-rate basis pursuant to a discretionary evaluation by the Commission lacking any basis is unjustified.

2. The Commission states in the first place that, in view of the magnitude of domestic production in Italy, the EAGGF decided to carry out an inquiry pursuant to Article 9 of Regulation No 729/70 in order to check that the Community aid disbursed pursuant to the special measures for soya beans had been paid in respect of a product which had actually been harvested and processed in the Community. It points out that the results of that inquiry, which was carried out in two stages from 23 to 26 August 1988 and from 5 to 23 September 1988, revealed that the controls carried out by the authorities were simply formal and fragmented and did not enable any unjustified increase in deliveries — through, for instance, the introduction of beans of non-Community origin into processing channels — to be uncovered; moreover, the Italian authorities admitted at the meeting held with the Commission's representatives on 12 October 1989 that there was a problem with supervising the harvesting and storage centres, and accepted the Commission's criticisms in this regard. Lastly, the Commission considers that, in view of the finding relating to the failure of the control system applied in Italy contrary to Article 8 of Regulation No 729/70, it is normal and proper that the Commission should draw general inferences as to the legality, effectiveness and fitness of the Italian control system. In any event, the fact that the Commission had ultimately decided to effect a financial correction significantly smaller than that which it could have applied, in order to make a gesture in Italy's favour, was not in any way capable of invalidating its reasons or of signifying that there was any weakness in its arguments.

(f) Expenditure in respect of aid granted for durum wheat

1. The Italian Republic starts by pointing out that, in a letter from the Commission dated 12 June 1987, the Italian authorities were asked, pursuant to Article 6 of Regulation No 283/72, to initiate an administrative inquiry with a view to checking the accuracy and correctness of data relating to areas intended for the cultivation of durum wheat in receipt of Community aid. Although the findings were notified to the Commission by memorandum of 8 January 1988, it was not until more than a year later that the Commission had proposed making a financial correction based on an extrapolation of the irregularities found. It stresses in this connection that, following an exchange of arguments, the Commission initially put forward a financial correction of LIT 116 billion for the 1984 to 1987 financial years; subsequently, that figure was reduced to LIT 67500305800, on the ground that, since the investigation had not been commenced until 1987, it had been considered fair not to go back on payments relating to 1984 and 1985, since they had already been made when the investigation had begun. As far as this point is concerned, the applicant observes that, on the basis of the selfsame criterion, the correction of LIT 31321690200 relating to 1986 should not have been effected either, since the relevant payments had also been made prior to 30 April 1987, that is to say, before the investigation had commenced. Likewise, the correction relating to 1987 (LIT 36179715600) should also be excluded, since the payments relating thereto had been made before 30 April 1988, when the Commission had not yet submitted its observations on the Italian report on controls. As regards the extrapolation criterion adopted by the Commission, the applicant argues as follows: The reference to Article 6 of Regulation No 283/72, on the basis of which the inquiry was carried out, is not relevant. That regulation is intended to reinforce the fight against irregularities, to recover sums wrongly paid in isolated cases where irregularities have been uncovered and to introduce a system of information and collaboration between the Member States and the Commission, but certainly not to enable extrapolation to be carried out. The extrapolation method may be used in the event of ‘systematic errors’ committed by the Member State in implementing the Community rule; but not in a context, such as the one in question, in which it is possible to speak only of anomalies in the practical performance of controls and in coordination between the central administration and external departments, but those anomalies were limited and restricted to local cases. The use of the method in question requires the Member State to accept and agree to all the details regarding its application to specific cases and, in any event, such a method cannot be imposed on the Member State. However, it was never made clear to the Italian authorities that the findings would be extrapolated with a view to making a ‘financial correction’, which, moreover, would extend to the three marketing years preceding that which had been the subject of the actual inquiry. What is more, if the Commission had actually made the aim of its inquiry known, the Italian authorities would not only not have accepted the system, they would at least have sought greater safeguards with regard to the selection and the number of samples. Extrapolation would have been possible at the most for a single financial year, that is to say, for the year to which the samples examined related. All the same, although it mentioned in the letter requesting the inquiry only ‘applications which resulted in the aid in question being received as from the 1984 financial year’, the Commission subsequently restricted the inquiry to a 1% sample of the regions taken into consideration and only to declarations relating to the 1986-1987 marketing year. It must be considered that the adoption of that criterion confines the findings to the declarations which were checked or, at the most, to declarations for the reference year, and it is not possible to extend it to declarations for preceding marketing years. Lastly, the applicant stresses the unshakeable, forceful conflict between the findings obtained by the Italian administration and those of the Commission inasmuch as the Italian side provided, in detail, all the requisite data concerning the individual crop declarations, whereas the Commission, for its part, confined itself to incontrovertible statements concerning the scale of the ‘fraud’ without ever providing comparative data relating to the methods used and the findings obtained.

2. The Commission argues in the first place that the applicant's arguments to the effect that payments already made at the time when the findings of an inquiry are notified should not be covered by corrections are completely irrelevant. It stresses that the concession made to Italy in the final decision taken with regard to the marketing years in question can afford no pretext for further concessions, since the Commission never justified that concession by stating that the payments relating to the two marketing years in question had already been made. On the contrary, the Commission had always made it clear that it was necessary to draw a distinction between the recipients' individual rights to aid and the Community funding; hence, if the Italian authorities take the view that individual rights have become acquired, despite the shortcomings found in the controls, this does not automatically mean that there must be EAGGF funding or that there is a presumption that declarations relating to areas which were not checked are authentic. As for the extrapolation criterion, the defendant considers, on the one hand, that the alternative to extrapolation would have been to disqualify all the expenditure declared and, on the other, that the results of the analysis confirmed the unacceptable nature of the situation created by the Italian authorities' shortcomings, which were manifestly in breach of Article 8 of Regulation No 729/70, and warranted making financial corrections in respect of the preceding marketing years, in which the same system had been in operation, since the Commission obviously could not physically inspect the preceding years' harvests. In its view, where the applicant seems to be arguing that, since the inquiry was carried out pursuant to Article 6 of Regulation No 283/72, its findings cannot be used in order to carry out a financial correction but only in order to improve recovery procedures, it ignores the responsibilities conferred on the Member States by Article 8 of Regulation No 729/70 and the obligation imposed on them to apply an appropriate control system with a view to safeguarding Community funds. The Commission concludes by stating that it carried out a statistical analysis of those very data which were provided to it by the Italian authorities and not of any data compiled by its departments.

M. Diez de Velasco

Judge- Rapporteur

1 Language of the case: Italian.