Report for the hearing in Case C-306/91
I — Background, pre-litigation procedure and procedure before the Court
A — Relevant legislation
1. The Community provisions
a) In the present case reference is made in particular to the provisions of:
Article 30 of the EEC Treaty concerning quantitative restrictions on imports between Member States and measures having equivalent effect;
Council Directive 72/464/EEC of 19 December 1972 on taxes other than turnover taxes which affect the consumption of manufactured tobacco (OJ, English Special Edition 1972 (31 December), p. 3);
Second Council Directive 79/32/EEC of 18 December 1978 on taxes other than turnover taxes which affect the consumption of manufactured tobacco (OJ 1979 L 10, p. 8).
b) The first recital in the preamble to Directive 72/464 (‘the directive’), adopted on the basis of Articles 99 and 100 of the Treaty, states that the objective of the Treaty is to establish an economic union within which there is healthy competition and whose characteristics are similar to those of a domestic market, and that, as regards manufactured tobacco, achievement of this aim presupposes that the application in the Member States of taxes affecting the consumption of products in this sector does not distort conditions of competition and does not impede their free movement within the Community. The directive lays down the general principles for the harmonization in several stages of the structures of the excise duty to which the Member States subject manufactured tobacco and the special provisions applying to each stage of harmonization. The second stage of harmonization began on 1 July 1978 (Article 3 of Council Directive 77/805/EEC of 19 December 1977, OJ 1977 L 338, p. 22) and has been extended by several successive directives, most recently by Council Directive 86/246/EEC of 16 June 1986 (OJ 1986 L 164, p. 26). Article 5 of the directive provides as follows: Article 12(2) requires the Member States to communicate to the Commission the text of the main provisions of national law which they adopt in the field covered by the directive.
‘1. Manufacturers and importers shall be free to determine the maximum retail selling price for each of their products. This provision may not, however, hinder implementation of the national systems of legislation regarding the control of price levels or the observance of imposed prices.
2. However, in order to facilitate the levying of the excise duty, the Member States may, for each group of manufactured tobacco, fix a scale of retail selling prices on condition that each scale has sufficient scope and variety to correspond in fact with the variety of Community products. Each scale shall be valid for all the products belonging to the group of manufactured tobacco which it concerns, without distinction on the basis of quality, presentation, the origin of the products or of the materials used, the characteristics of the undertakings or of any other criterion.’
c) Directive 79/32, for its part, defines the various types of manufactured tobacco.
2. The national provisions
In Italy the sale of manufactured tobacco is subject to a State monopoly.
That monopoly, which is governed by Law No 907 of 17 July 1942 (GURI No 199 of 26 July 1942), was amended inter alia to take account of the Community requirements by Law No 825 of 13 July 1965 (GURI No 182 of 22 July 1965), Law No 3 of 27 January 1971 (GURI No 24 of 29 January 1971), Law No 724 of 10 December 1975 (GURI No 4 of 7 January 1976), Law No 198 of 13 May 1983 (GURI No 138 of 21 May 1983) and Law No 76 of 7 March 1985 (GURI No 65 of 16 March 1985).
Under the provisions of Law No 825 of 13 July 1965, as amended by Law No 76 of 7 March 1985, a scale is laid down of selling prices of monopoly goods. In the prices shown in the scale a distinction is made between, first, the remuneration of the traders involved at the various manufacturing and distribution stages, secondly, the retailer's margin and, finally, the taxes to which the product is subject (excise duty, VAT).
Article 2 of Law No 825 of 13 July 1965 reads as follows:
‘The inclusion of each product subject to the State monopoly in the tariffs referred to by Article 1 and changes in that regard shall be effected by decree of the Minister of Finance in relation to the prices requested by suppliers for imported goods, after obtaining the opinion of the Administrative Board for State Monopolies, and in relation to the prices proposed by the said Board for other goods’.
B — Pre-litigation procedure
1. By letter before action of 9 June 1989 the Commission informed the Italian authorities that it considered that, first, in view of the discretion left to the Minister of Finance by Article 2 of Law No 825 to fix the price of manufactured tobacco and of the advisory role conferred by that article on the Administrative Board for State Monopolies and, secondly, by virtue of the conditions in which that article was applied, the said article was contrary to Article 5(1) of the directive, which gives manufacturers and importers freedom to determine the maximum retail selling prices of their products.
2. In their reply of 26 October 1989, the Italian authorities stated that since 1959 various amendments had been made, as a result of negotiations with the Commission, to the applicable national legislation in order to bring it into conformity with Community law. Furthermore, as the Court had held in the judgment in Case 78/82 Commission v Italy [1983] ECR 1955, the Italian system for determining the selling prices of manufactured tobacco complied with the requirements of the directive concerning the freedom of manufacturers and importers to set prices. Lastly, both foreign and national manufacturers had always obtained the inclusion of the prices they requested in the scale.
3. On 28 August 1990 the Commission delivered a reasoned opinion under Article 169 of the Treaty in which it complained that the Italian authorities had infringed the provisions of Article 30 of the Treaty and the provisions of the directive, in particular Article 5(1), on the ground that the directive had not been implemented in national law.
4. The Italian authorities submitted no observations in response to the reasoned opinion.
II — Forms of order sought by the parties
The Commission claims that the Court should:
declare that the Italian Republic has failed to fulfil its obligations under Article 30 of the Treaty and Article 5 of the directive by fixing, by decrees of the Minister of Finance, retail selling prices for manufactured tobacco at a level which, by reason also of the considerable delays in the adoption of the said decrees, does not correspond to that which is requested by importers or manufacturers;
order the defendant to pay the costs.
The Italian Republic claims that the Court should:
dismiss the application as inadmissible in part and unfounded as to the remainder;
order the applicant to pay the costs.
III — Summary of the pleas and arguments of the parties
A — Infringement of the directive
1. The complaint alleging that Article 12(2) of the directive has been infringed The Commission maintains that Italy failed to communicate in the manner laid down by Article 12(2) of the directive the main national provisions implementing the directive, more particularly Article 5. The fact that the Commission learned through an unofficial channel of the text of Law No 825 of 13 July 1965, which is the only legislation laying down the procedures for fixing the selling price of manufactured tobacco, cannot dispense Italy from the obligation to communicate the national provisions (Case 274/83 Commission v Italy [1985] ECR 1077) so as to enable the Commission to carry out the necessary review (Case 96/81 Commission v Netherlands [1982] ECR 1791 and Case 97/81 Commission v Netherlands [1982] ECR 1819). The Italian Government contends that the Commission was necessarily aware of the provisions of Law No 825 of 13 July 1965 in the context of the negotiations with the Commission with a view to bringing the national provisions concerning the tobacco monopoly into conformity with Community law and in connection with the previous infringement proceedings brought against Italy with regard to the national rules applicable to tobacco (Case 78/82 Commission v Italy, cited above). The parties to the action agree that this complaint is in any case not an essential aspect of the dispute.
2. The complaints alleging that Article 5(1) of the directive has been infringed (a) Compatibility of Article 2 of Law No 825 of 13 July 1965 with Article 5(1) of the directive (i) Existence of a discretion on the part of the Minister of Finance to fix the prices of manufactured tobacco The Commission maintains that the words ‘in relation’used in Article 2 of Law No 825 of 13 July 1965 are ambiguous and suggest that the Minister of Finance has a certain discretion to fix the prices of manufactured tobacco. However, the discretion conferred in this way on the Italian authorities disregards the requirements arising from Article 5 of the directive. Article 5(1) lays down the general principle that importers are free to determine the maximum retail selling price of each of their products (Case 90/82 Commission v France [1983] ECR 2011). The scope of the derogating provisions in Article 5(2) is very limited. The price scales authorized by them must have the sole object of facilitating the levying of excise duty. In addition, the scales must have sufficient scope and variety to correspond in fact with the variety of Community products (Case C-287/89 Commission v Belgium [1991] ECR I-2233, Opinion of Advocate General Mischo). The judgment in Case 78/82 Commission v Italy, cited above, dismissing an earlier action brought by the Commission for failure to fulfil Community obligations, cannot be interpreted as meaning that the conditions for fixing the prices provided for by Article 2 of Law No 825 of 13 July 1965 are consistent with the directive. That judgment concerned only the question of the uniform profit margin of licensed resellers and not the freedom of suppliers to fix their selling prices. The Italian Government denies that there is any ambiguity in the words ‘in relation’, which merely express, by using the resources and variety of the Italian language, the link which exists between the price requested and chosen by manufacturers and importers and its inclusion in the scale. Furthermore, in the judgment in Case 78/82 Commission v Italy, cited above, the Court expressly held in paragraphs 3 and 17 that the national law did not affect the freedom of manufacturers and importers to fix the retail selling prices of their products. If the Commission's argument was wellfounded, the Court would have been bound to find in that judgment that there was a failure to fulfil the Community-law obligation which is the subject of the present action, even though it was not the subject of the earlier action. (ii) Prior consultation of the Administrative Board for State Monopolies According to the Commission, the prior consultation of the Administrative Board for State Monopolies provided for by Article 2 of Law No 825 of 13 July 1965 is contrary to Article 5(1) of the directive. Contrary to the Italian argument, the function of this Board in the advisory procedure is not only to give the Minister technical assistance in order to add new products correctly to the scales of selling prices by reference to their characteristics. The Board's opinion must be obtained even for a mere change in the price of products already included in the scale. Likewise, the part played by the Administrative Board for State Monopolies cannot be justified by the requirements for the general control of prices which, under certain circumstances, permit derogation from the freedom of manufacturers and importers to fix prices (Case 13/77 GB-Inno-BM v Vereniging van de Kleinhandelaars in Tabak [1977] ECR 2115 and Case 90/82 Commission v France, cited above). The Board in fact has no power to exercise such control. It must also be stressed that the Board is informed, by means of this advisory procedure, of the intended commercial policy of competitors of the monopoly. The Commission adds that requests by importers concerning the prices of their products are addressed to the Minister of Finance through the State monopoly. The Italian Government contends that the products themselves, not the prices, are the subject of the disputed advisory procedure. In view of the classification of the different groups of manufactured tobaccos laid down by Directive 79/32 (‘the Second Directive’), the consultation of the Administrative Board for State Monopolies is only intended to assist the Minister to classify products correctly. In addition, the purpose of the advisory procedure is not to inform the State monopoly about the commercial policy of foreign manufacturers. First, the national price-fixing system is based on absolute transparency, since the pricing policy of each manufacturer is known in this way to the other manufacturers. Secondly, it should be observed that foreign manufacturers have in fact entered into contracts with the monopoly for the distribution of their products in Italy. This shows why they submit their requests for the inclusion and alteration of prices in the scale through the monopoly. (b) The conditions of application of Article 2 of Law No 825 of 13 July 1965 and their compatibility with Article 5(1) of the directive On the basis of complaints, which the Commission has placed on file, from the trade associations of manufacturers of manufactured tobacco of various Member States, the Commission describes the difficulties encountered by them in connection with the examination of their requests for the inclusion or alteration of prices in the scale under Article 2 of Law No 825 of 13 July 1965. (i) The Italian Government's objection of inadmissibility The Italian Government contends that neither the letter before action nor the reasoned opinion mentions those specific alleged infringements referred to in the complaints, which were not produced by the Commission until the proceedings before the Court. During the pre-litigation stage the only issue appeared to be the actual content of the national legislation, and it was on that point that Italy submitted its observations. Therefore the Commission could not, without infringing the principle audi alteram partem as far as Italy was concerned, extend the subject-matter of the dispute to particular instances of the application of the national provisions upon which the defendant had not been given an opportunity to 1982submit observations beforehand. The Commission considers that the objection of inadmissibility is unfounded. It was clear as from when the notice before action was sent that the dispute related both to the content of Article 2 of Law No 825 of 13 July 1965 and to the practice of the Italian authorities. In the letter before action and the reasoned opinion, the Commission referred to complaints by traders and the defendant had submitted observations on this point in its reply to the letter before action. The letter before action and the reasoned opinion described the infringements complained of in similar terms and fulfilled the requirements laid down by the Court's case-law (Case 211/81 Commission v Denmark [1982] ECR 4547). The Commission did not produce the complaints during the pre-litigation stage because most of them had originally been addressed to the Italian authorities. (ii) The existence of practices by the Italian authorities contrary to Article 5(1) of the directive According to the Commission, the complaints in the file show that, in response to requests for changes in the prices of imported manufactured tobacco products, the Italian authorities sometimes: refused the increases requested or granted increases lower than those requested; allowed such increases after a very long period because the decrees of the Minister of Finance provided for by Article 2 of Law No 825 of 13 July 1965 are generally issued once a year. Such practices penalized foreign manufacturers, who had to submit their requests for price increases, not on the basis of objective factors, but on that of forecasts as to whether and, if so, when and to what extent, an increase would be allowed. The launching of new brands of cigarettes on the Italian market was even more difficult because manufacturers sometimes had to wait more than two years before the prices of their products were included in the scale. The Commission also rejects the argument first put forward by the Italian Government in its defence to the effect that refusals to increase prices were justified, under Article 5 of the directive, by the application of the general requirements concerning price controls in Article 17 of Finance Law No 41 of 28 February 1986 (GURI No 49, Supplemento Ordinario of 28 February 1986). First, that provision, which merely gives an interministerial committee on prices the task of delivering a binding opinion on proposals by State authorities for tariff increases, cannot be regarded as national legislation on the control of price levels or the observance of imposed prices within the meaning of the directive and the Court's case-law. Secondly, this argument is inconsistent with statements made by Italy in the reply to the letter before action to the effect that foreign manufacturers had not been refused any price increase. Finally, that argument can in any case only apply to 1986, because thereafter manufactured tobacco was withdrawn from the scope of Article 17 of the abovementioned law. Therefore that defence argument cannot apply to refusals made by the Italian authorities before or after 1986. Likewise, the Italian Government's arguments concerning the need to organize complex technical inquiries in order to justify the delays in examining requests for the inclusion of prices in the scale do not appear convincing. Such delays affected not only requests for the inclusion of the prices of new products in the scale, but also straightforward requests for price increases, although examination of the latter did not necessitate such technical inquiries. The Italian Government contends that Article 2 of Law No 825 of 13 July 1965 has been interpreted and applied in a manner conforming to the directive, since the Court's case-law on which the Commission relies is inapplicable in this respect because it relates to situations different from the present case. It was for only very short periods prior to the commencement of the pre-litigation procedure that there was an exception to the rule that manufacturers and importers are free to fix the price of their products. The cases referred to by the Commission in which foreign manufacturers received refusals arise from the application of Article 17 of Law No 41 of 28 February 1986, cited above, which aimed to contain inflation. In order to respond to the concerns of foreign manufacturers, that control was discontinued in relation to manufactured tobacco in 1987. That defence argument is out of time because the complaint itself was made out of time. With regard to the delays in the examination of requests, they were justified by the introduction of the technical controls necessitated by the implementation of Directive 79/32 concerning the classification of the various tobaccos. The delays affected only the examination of requests for the inclusion of prices of new products and came to an end in 1990 when the tobacco supervision service was reorganized. According to the Italian Government, there are now no cases of refusal or delay in the examination of requests concerning the prices of manufactured tobacco constituting an infringement of the directive.
B — Infringement of Article 30 of the Treaty
According to the Commission, the practice of the Italian authorities in sometimes refusing price increases requested by importers, or allowing them only in part or after a delay, or in sometimes compelling importers to refrain from launching new brands on the Italian market, impedes free trade and constitutes a measure having equivalent effect within the meaning of Article 30 of the Treaty, as it has been interpreted by the Court.
In that connection, the Commission observes that the fact that the national authorities apply with considerable delay procedures which they are required to apply in relation to importers may amount to a measure having equivalent effect (Case 21/84 Commission v France [1985] ECR 1355).
The Italian Government submits that the system provided for by the national legislation and the conditions in which it is applied do not create any obstacle to the free movement of goods, because importers are free to choose the price of their products inside and outside the scale (at present the scale comprises 137 prices for cigarettes alone).
The Italian Government adds that, of an annual consumption of 91000 tonnes of manufactured tobacco, 35000 tonnes are accounted for by foreign brands imported direct from other Member States and 10000 tonnes by foreign brands manufactured under licence from the national manufacturer. Those figures alone show that the Commission's argument concerning obstacles to the free movement of goods is unfounded.
IV — Replies to questions put by the Court
Questions
The Italian Republic was asked:
to produce the text of Law No 907 of 17 July 1942 in the version which was in force on the expiry of the period prescribed by the reasoned opinion;
to describe the procedure applicable for setting the prices of manufactured tobacco in Italy;
to describe the composition and statutory powers of the Administrative Board for State Monopolies.
Replies
The Italian Republic produced the updated text of Law No 907 of 17 July 1942.
In reply to the Court's questions, it provided the following information:
a) The selling prices to the public of national manufactured tobaccos are fixed by decree of the Minister of Finance on the basis of the prices proposed by the Administrative Board for State Monopolies.
b) The composition of the Administrative Board for State Monopolies is laid down by Article 2 of Decree (Royal Decree-Law) No 2258 of 8 December 1927, which provides that:
‘The Administrative Board shall be chaired by the Minister of Finance and shall consist of the following members:
a) the Under-Secretary of State for Finance;
b) a member of the State Council;
c) the Comptroller-General of the State or his representative;
d) an Avvocato dello Stato of a grade higher than grade 4;
e) the Director-General of State Monopolies;
f) a director-general of the Ministry of Agriculture and Forestry;
g) the Deputy Director-General of State Monopolies;
h) the central directors of the State monopolies;
i) three members chosen from among persons of proven competence, who need not be in the finance administration;
j) three representatives of the staff of the autonomous administration of State monopolies appointed by the Minister of Finance on a proposal by the trade union bodies of such staff, the said proposal to contain three times as many persons as there are board members to be appointed. The appointment of the latter will also be subject to the procedures of Article 1 of Royal Decree No 2452 of 29 December 1927, having regard to the representative nature of the said trade unions.’
c) The powers of the Board are set out in Article 5 of Decree (Royal Decree) No 2452 of 29 December 1927, as follows:
‘The Administrative Board must be consulted on the following matters:
1) proposals for regulations on the organization and operation of services of the administration;
2) the opening or closure or changes in the location of factories, offices, warehouses and agencies for the purchase of raw materials or auxiliary materials;
3) measures concerning the selling tariffs for State tobacco, salt and quinine in the Kingdom, for export and for ships' provisions;
4) determination of the tobacco crop quota for State factories and for export;
5) rules on the export of products and the sale abroad of raw tobacco and tobacco waste;
6) proposals for new construction, improvement of buildings, plant and works the cost of which is over LIT 50000;
7) purchase of buildings intended for its own use;
8) estimates for the production and purchase of raw materials;
9) draft provisional budget, proposals for amendments in the course of the year, accounts;
10) withdrawals from the reserve fund;
11) contracts concluded by public tender or by restricted procedure the value of which exceeds LIT 100000 and amendments to such contracts, and private contracts the value of which exceeds LIT 50000;
12) services to be carried out with State supervision, where the amount exceeds LIT 30 000;
13) judicial proceedings where the value of the subject-matter of the dispute exceeds LIT 50000;
14) compromises intended to put an end to a dispute, where the value of whatever is waived or surrendered by the authority exceeds LIT 20000, and remission of contractual penalties;
15) plans for the organization of employed staff and alterations thereto, provisions concerning the recruitment and remuneration of staff;
16) promotion of employed staff, admission of officials of other services to the special services of the autonomous authority in the cases specified, transfer of employees from one service to another;
17) rules on the grant of allowances and bonuses and efficiency bonuses to staff;
18) regulations concerning workers employed by monopoly undertakings and economic treatment of employees paid by the day and on a piecework basis;
19) all other matters concerning the administration which, at the request of the minister or on the initiative of the director-general, are subject to examination by the said Board’.
d) The Italian Republic adds that, as part of the conversion of the State monopoly corporation into a company limited by shares, the Administrative Board is being replaced by a committee which supervises the management and the winding-up of the corporation and provisionally exercises all operations relating to advisory functions.
F. Grévisse
Judge-Rapporteur
1 Language of the case: Italian.