C-228/05 Stradasfalti

JUDGMENT OF THE COURT (Third Chamber)

14 September 2006 *

In Case C-228/05,

REFERENCE for a preliminary ruling under Article 234 EC from the Commissione tributaria di primo grado di Trento (Italy), made by decision of 21 March 2005, received at the Court on 24 May 2005, in the proceedings

Stradasfalti Srl

v

Agenzia delle Entrate — Ufficio di Trento,

THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, J. Malenovský, J.-P. Puissochet (Rapporteur), A. Borg Barthet and U. Lõhmus, Judges,

* Language of the case: Italian Advocate General: E. Sharpston,

Registrar: M. Ferreira, Principal Administrator,

having regard to the written procedure and further to the hearing on 6 April 2006,

after considering the observations submitted on behalf of:

— Stradasfalti Sri, by B. Santacroce, avvocato,

— the Italian Government, by I.M. Braguglia, acting as Agent, assisted by G. De Bellis, avvocato dello Stato,

— the Commission of the European Communities, by A. Aresu and M. Afonso, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 22 June 2006,

gives the following

Judgment

Legal context and the dispute

1The reference for a preliminary ruling concerns the interpretation of Article 17(7) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the STRADASFALTl

laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, 'the Sixth Directive').

2This reference was made in proceedings between the limited company Stadasfalti Sri ('Stradasfalti') and the Agenzia delle Entrate — Ufficio di Trento (Revenue Agency — Trento Office) concerning reimbursement of the value added tax (VAT) which Stradasfali paid in the years 2000 to 2004 on the purchase, use and maintenance of tourist vehicles which were not intrinsic to its business activity as such.

Legal context

Community legislation

3Article 17 of the Sixth Directive, entitled Origin and scope of the right to deduct' provides in paragraph 2(a) that '[i]n so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay ... value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person'.

4Article 17(6) of the Sixth Directive provides:

'Before a period of four years at the latest has elapsed from the date of entry into force of this directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this directive comes into force.'

5Article 17(7) of the Sixth Directive provides:

'Subject to the consultation provided for in Article 29, each Member State may, for cyclical economic reasons, totally or partly exclude all or some capital goods or other goods from the system of deductions. To maintain identical conditions of competition, Member States may, instead of refusing deduction, tax the goods manufactured by the taxable person himself or which he has purchased in the country or imported, in such a way that the tax does not exceed the value added tax which would have been charged on the acquisition of similar goods.'

6Article 29(1) and (2) of the Sixth Directive provides:

'1. An Advisory Committee on value added tax ["the VAT Committee"], hereinafter called "the Committee", is hereby set up.

2. The Committee shall consist of representatives of the Member States and of the Commission.

The chairman of the Committee shall be a representative of the Commission.

Secretarial services for the Committee shall be provided by the Commission.'

National legislation

7The relevant national legislation is contained in Article 19a(1), entitled 'Exclusion or reduction of the deduction in respect of certain goods and services' of Decree No 633 of the President of the Republic of 26 October 1972 (ordinary supplement to the GURI No 292, of 11 November 1972), as amended by Article 3 of Legislative Decree No 313 of 2 September 1997 (ordinary supplement to the GURI No 219, of 27 December 1997).

8The said Article 19a(1) provides:

'Notwithstanding Article 19:

(c) tax on the purchase or importation of mopeds, motorcycles, passenger cars and motor vehicles referred to in Article 54(a) and (c) of Legislative Decree No 285 of 30 April 1992, not included in Table B annexed hereto and not intended for public use, which are not intrinsic to the business activity as such, and the associated components and spare parts, as well as on the supply of services referred to in Article 16(3), and on services linked to the use, holding, maintenance and reparation of the said goods, may not be deducted other than by commercial agents or representatives;

(d) tax on the purchase or importation of fuel and lubricants for passenger cars and motor vehicles, aircraft, ships and pleasure boats may be deducted if the tax on the purchase, importation or acquisition under leasing arrangements, chartering and similar of the passenger cars, vehicles, aircraft and ships in question may be deducted.'

9The effect of that provision was limited to 31 December 2000 by Article 7(3) of Law No 488 of 23 December 1999 (ordinary supplement to the GURI No 302, of 27 December 1999).

10It was then extended and its field of application amended by Article 30(4) of Law No 388 of 23 December 2000 (ordinary supplement to the GURI No 302, of 29 December 2000), which stated:

'The non-deductibility of [VAT] on transactions relating to mopeds, motorcycles, passenger cars and motor vehicles referred to in Article 19a(l)(1)(c) of Decree No 633 of the President of the Republic of 26 October 1972, extended most recently until 31 December 2000 by Article 7(3) of Law No 488 of 23 December 1999, is again extended until 31 December 2001; however, as regards the purchase, importation and acquisition through leasing arrangements, chartering and similar of the said vehicles, the non-deductibility is reduced to 90% of the amount in question and to 50% in the case of vehicles not powered by internal combustion.'

11That text remained in force as a result of further annual extensions. The expiry date was thus amended by Article 9(4) of Law No 448 of 28 December 2001, then by Article 2(13) of Law No 289 of 27 December 2002, by Article 2(17) of Law No 350 of 24 December 2003 and, finally, by Article 1(503) of Law No 311 of 30 December 2004 which extended it until 31 December 2005.

The main proceedings and the questions referred for a preliminary ruling

12Stradasfalti is a limited company governed by Italian law, whose registered office is in the province of Trente and which carries out road works.

13It owns company cars which are not intrinsic to its activity as such, with the result that the purchase, use, maintenance and supply of fuel of such vehicles have not given rise to a right to deduct VAT, pursuant to the Italian legislation.

14Taking the view that that legislation was incompatible with the provisions of the Sixth Directive concerning the deductibility of VAT, Stradasfalti claimed, on 7 July 2004, repayment from the Revenue Agency — Trento Office of around EUR 31 340 by way of reimbursement of VAT paid from 2000 to 2004 for the purchase, use, maintenance and supply of fuel for its company cars.

15That claim was rejected by several decisions adopted on 15 July 2004 by the Revenue Agency — Trento Office.

16On 22 November 2004, Stradasfalti brought an action before the Commissione tributaria di primo grado di Trento (Tax Court of First Instance, Trento), seeking the annulment of those decisions and reimbursement of the VAT for the periods in question.

17It is against that background that the Tax Court of First Instance, Trento decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:

'(1) Is the first sentence of Article 17(7) of [the] Sixth ... Directive ..., in relation to paragraph 2 of that article, to be interpreted as:

(a) precluding from being treated as "consultation of the VAT Committee", for the purposes of Article 29 of that directive, the mere notification by a Member State of the adoption of a rule of national law, such as the present Article 19a(1)(c) and (d) of the Decree of the President of the Republic No 633/72 as subsequently extended, which restricts the right of VAT deduction in respect of the use and maintenance of the goods referred to in Article 17(2), on the basis that the VAT Committee has merely taken notice of the adoption of that rule?;

(b) also precluding from being treated as a measure falling within its scope any restriction whatsoever of the right to deduct VAT connected to the purchase, use and maintenance of the goods referred to in (a), introduced before the consultation of the VAT Committee and maintained in force by means of various legislative extensions adopted in unbroken succession for more than 25 years?;

(c) if the answer to Question 1 (b) is in the affirmative, the Court is asked to provide guidelines for determining the maximum period, if any, for such extensions on grounds of cyclical economic reasons referred to in Article 17(7) of the Sixth Directive; or else to state whether the failure to observe the temporary nature of the derogations (repeated over time) confers on the taxpayer the right to deduct.

(2) If the requirements and conditions for the procedure under Article 17(7) have not been complied with, is Article 17(2) of the Sixth Directive to be interpreted as precluding a rule of national law or an administrative practice adopted by a Member State after the entry into force of the Sixth Directive (1 January 1979 for Italy) which, objectively and without limitation in time, restricts VAT deduction in respect of the purchase, use and maintenance of certain motor vehicles?'

The questions referred

Question 1(a)

18By question 1(a), the referring court asks whether the first sentence of Article 17(7) of the Sixth Directive must be interpreted as precluding from being treated as 'consultation of the VAT Committee', for the purposes of Article 29 of that directive, the notification by a Member State of the adoption of a rule of national law which limits the right to deduct VAT in respect of the use and maintenance of the goods referred to in Article 17(2), the VAT Committee limiting itself to taking note of such notification.

Observations submitted to the Court

19The Commission submits that the consultation of the VAT Committee for the purposes of Article 29 of the Sixth Directive is an essential procedural condition for the application of the derogations concerning VAT deduction for cyclical economic reasons. The consultation of that committee must allow the representatives of the Member States and of the Commission to examine together the national measures derogating from the rule of deductibility of VAT. The mere notification of the VAT Committee of the national legislation, adopted or on the point of being adopted, cannot be considered to be sufficient consultation, any more than can the Committee's taking note of the national legislation notified to it.

20That interpretation of Article 29 of the Sixth Directive is confirmed by the different linguistic versions of Article 17(7) of that directive. The Court has moreover already held, in Case C-409/99 Metropol and Stadler [2002] ECR I-81, that consultation of the VAT Committee was a condition precedent to the adoption of any measure on the basis of Article 17(7).

21Concerning the measure at issue in the main proceedings, the Italian Government consulted the VAT Committee in 1980 and specified, through its representative, the content and scope of the measure during the meeting of that institution held that year. It followed the same procedure at the time of the successive extensions of the measure, consulting that committee in 1990, 1995, 1996, 1999 and 2000.

22The Commission recognises that the VAT Committee was consulted after the entry into force of the derogating measure, and queries whether Article 17(7) of the Sixth Directive requires consultation to take place before the entry into force. However, the procedure adopted in the present case by the Italian authorities seems to respect the prerogatives of the VAT Committee and to be consistent with the practice adopted by the other Member States. The Commission therefore relies on the wisdom of the Court to resolve that question.

23The Italian Government submits that the procedure followed in the case in point did not infringe the obligation to consult the VAT Committee. That government made an express application to that committee, on the basis of which the Commission services were able to draw up a working document, before the dossier was submitted to the committee. What the judge described as 'merely taking note' is in fact the decision of the VAT Committee ending the consultation procedure referred to in Article 17(7) of the Sixth Directive.

24In any case, and even if the procedure was not followed to the letter, the Italian Government submits that Article 17(7) of the Sixth Directive was not infringed.

25Stradasfalti first points out that Article 19a(1)(c) and (d) of Decree No 633 of the President of the Republic of 26 October 1972, as amended, is incompatible with the Sixth Directive as the derogation from the right to deduct which it establishes does not fall within any of the categories of permitted derogations laid down by that directive. The measure at issue is contrary to Article 17(7) of the directive, as the VAT Committee was not consulted beforehand by the Italian Government, the cyclical economic reasons which alone could justify the derogation from the right to deduct VAT have never existed and the measure in question, far from being temporary, has been applied systematically for more than 25 years.

26Concerning Question 1(a), Stradasfalti submits that the Community legislation requires actual consultation within the VAT Committee which alone allows monitoring of the use by the Member States of the possibility of derogation under Article 17(7) of the Sixth Directive. This provision therefore precludes a derogation from the right to deduct VAT from being introduced by the mere prior notification of a rule of national law of a Member State, or the mere prior notification of the Member State's intention to adopt such a provision, the VAT Committee limiting itself to taking note of that intention.

Grounds

Findings of the Court

27Article 17(7) of the Sixth Directive lays down one of the procedures for authorising derogations in that directive, giving Member States the right to exclude goods from the system of deductions '[s]ubject to the consultation provided for in Article 29'.

28That consultation enables the Commission and the other Member States to control the use by a Member State of the possibility of derogating from the general system of deducting VAT, by checking in particular whether the national measure in question satisfies the condition of adoption for cyclical economic reasons.

29Article 17(7) of the Sixth Directive thus lays down a procedural obligation which the Member States must observe in order to be able to make use of the derogation it sets out. Consultation of the VAT Committee is clearly a condition precedent to the adoption of any measure on the basis of that provision (see Metropol and Stadler, paragraphs 61 to 63).

JO The obligation to consult the VAT Committee would be deprived of its meaning if the Member States merely notified it of the national derogating measure which they envisaged adopting without including any explanation as to the nature and scope of the measure. The VAT Committee must be in a position to deliberate properly on the measure submitted to it. The procedural obligation referred to in Article 17(7) of the Sixth Directive therefore presupposes that the Member States will inform that committee that they envisage adopting a derogating measure and that they will provide it with sufficient information to enable it to examine the measure with full knowledge of the facts.

31On the other hand, Article 17(7) of the Sixth Directive does not lay down any obligation as to the result of the consultation of the VAT Committee, and in particular does not require that committee to take a favourable or unfavourable decision on the national derogating measure. There is therefore nothing to prevent the VAT Committee from simply taking note of the national derogating measure communicated to it.

32Therefore, the answer to Question 1(a) must be that the first sentence of Article 17(7) of the Sixth Directive requires the Member States, in order to respect the procedural obligation of consultation laid down by Article 29 of that directive, to inform the VAT Committee that they intend to adopt a national measure derogating from the general system of deducting VAT and to provide that committee with sufficient information to enable it to examine the measure in full knowledge of the facts.

Question 1(b) and (c), first part

33By its Question 1(b) and (c), first part, the referring court asks essentially whether the first sentence of Article 17(7) of the Sixth Directive must be interpreted as meaning that it authorises a Member State to exclude the goods referred to in Article 17(2) of that directive from the system of deducting VAT:

— without prior consultation of the VAT Committee, and

— without limitation in time.

Observations submitted to the Court

34The Commission recalls that provisions laying down derogations from the principle of the right to deduct are to be interpreted strictly (see Metropol and Stadler, paragraph 59). The Court has already ruled that the application of the measures referred to in Article 17(7) of the Sixth Directive, which allows exceptions to the rule of deductibility to be introduced for 'cyclical economic reasons', must be limited in time, and that such measures cannot, by definition, be of a structural nature (see Metropol and Stadler, paragraph 69).

35In that respect, the measure at issue in the main proceedings appeared in Italian legislation in 1979 as a permanent provision. It was only in 1980 that its application was limited in time, this limitation has however been successively extended since then. The measure appears in fact to have been adopted with the aim of preventing tax evasion and avoidance, objectives which fall within the procedure and special conditions referred to in Article 27 of the Sixth Directive.

36The VAT Committee has indeed repeatedly pointed out to the Italian Government, since 1980, that the derogation in question could not be justified on the basis of Article 17(7) of the Sixth Directive. The more conciliatory attitude adopted by that committee during its meetings of 1999 and 2000 was a result of the Italian authorities' undertaking — which was not honoured — to re-examine the measure before 1 January 2001 and the possibilities presented at that time by the Commission's proposal to amend the Sixth Directive as regards the right to deduct VAT.

37Under those circumstances, the Commission considers that the derogation at issue in the main proceedings is incompatible with Article 17(7) of the Sixth Directive.

38The Italian Government submits that Question 1(b) is irrelevant and accordingly inadmissible.

39In fact, the dispute in the main proceedings concerns only VAT paid in the years 2000 to 2004. The requests for consultation of the committee preceded the adoption of the national measure extending the derogation in 1999 and in 2000. Under those circumstances, the question submitted to the Court goes beyond the legislation applicable to the dispute in the main proceedings and is, therefore, inadmissible (see, most recently, Case C-165/03 Längst [2005] ECR I-5637). In any case, the Court has held that Article 27 of the Sixth Directive does not preclude the Council's decision authorising a Member State to adopt special measures derogating from the said directive from being introduced a posteriori (see Case C-17/01 Sudholz [2004] ECR I-4243, paragraph 23). The same rule should apply to the consultation of the VAT Committee referred to in Article 17(7) of the same directive.

40Question 1(c), first part, is purely hypothetical and accordingly also inadmissible.

41Stradasfalti takes the view that the reply to Question 1(b) is that Article 17(7) of the Sixth Directive precludes a derogation from the right to deduct VAT from being introduced before consultation of the VAT Committee, as the Community legislation expressly requires prior consultation of that committee.

42In the same way, Article 17(7) of that directive requires the derogation to be of a temporary nature, as it must, as the Court has ruled, be adopted for cyclical economic reasons. That article therefore precludes the continuation of the derogation in question for more than 25 years by means of successive extensions.

43Concerning Question 1(c), Stradasfalti submits that the Court has already held, in Metropol and Stadler, that Article 17(7) only authorises a Member State to depart from the Community system of deduction of VAT for a 'determined period'. Advocate General Geelhoed, in his Opinion in that case, defined cyclical economic policy as that seeking to influence, over 'short periods of time', no more than 'one or two years in length', the macroeconomic quantities of a country. A derogation which continues for more than 25 years clearly infringes Article 17(7) of the Sixth Directive.

Findings of the Court

— The admissibility of the questions

44The procedure provided for by Article 234 EC is an instrument of cooperation between the Court of Justice and national courts, by means of which the Court provides the national courts with the points of interpretation of Community law which they need in order to decide the disputes before them (see, in particular, Case C-380/01 Schneider [2004] ECR I-1389, paragraph 20).

45In the context of that cooperation, it is solely for the national court, before which the dispute has been brought and which must assume responsibility for the subsequent judicial decision, to determine in the light of the particular circumstances of the case both the need for a preliminary ruling in order to enable it to deliver judgment and the relevance of the questions which it submits to the Court. Consequently, where the questions submitted concern the interpretation of Community law, the Court is, in principle, bound to give a ruling (Schneider, paragraph 21).

46Nevertheless, the Court has also held that, in exceptional circumstances, it can examine the conditions in which the case was referred to it by the national court, in order to assess whether it has jurisdiction. The Court may refuse to rule on a question referred for a preliminary ruling by a national court only where it is quite obvious that the interpretation of Community law that is sought bears no relation to the facts of the main action or its purpose, where the problem is hypothetical, or where the Court does not have before it the factual or legal material necessary to give a useful answer to the questions submitted to it (Schneider, paragraph 22).

47The spirit of cooperation which must prevail in the preliminary ruling procedure requires the national court to have regard to the function entrusted to the Court of Justice, which is to assist in the administration of justice in the Member States and not to deliver advisory opinions on general or hypothetical questions (Schneider, paragraph 23).

48In the present case, it is apparent from the observations submitted to the Court that although the dispute in the main proceedings concerns only VAT paid in the years 2000 to 2004, years in respect of which the requests for consultation of the VAT Committee, according to the Italian Government, preceded the adoption of the national measure extending the derogation, the latter in fact entered into force before that period and was systematically renewed for several years. It therefore does not appear that the interpretation of Community law sought bears no relation to the facts of the main proceedings or raises a hypothetical problem.

STRADASFALTl

49Consequently, it must be held that Question 1(b) and (c), first part, is admissible.

— Substance

50Concerning Question 1(b), which is intended to establish whether Article 17(7) of the Sixth Directive authorises a Member State to exclude goods from the system of deducting VAT without first consulting the VAT Committee, the Court has already held, as stated at paragraph 29 above, that consultation of that committee is a condition precedent to the adoption of any measure on the basis of that provision (see Metropol and Stadler, paragraphs 61 to 63).

51Contrary to the submissions of the Italian Government, the reply to that question cannot be inferred from the approach adopted by the Court in Sudholz. By that judgment, the Court held inter alia that Article 27 of the Sixth Directive does not require the Council to authorise special measures for derogation adopted by the Member States before the enactment of those measures. However, the consultation procedure laid down by Article 17(7) of the Sixth Directive, which is at issue in the present case, does not have the same objective as the authorisation procedure laid down by Article 27 of that directive. The Italian Government consequently has no grounds for arguing that it follows from Sudholz that the solution already adopted by the Court in Metropol and Stadler does not apply in the present case.

52As regards Question 1(c), first part, which is intended to establish whether Article 17(7) of the Sixth Directive authorises a Member State to exclude goods from the system of VAT deduction without limitation in time, it should be recalled that that article authorises the Member States to exclude goods from the system of deductions 'for cyclical economic reasons'.

53That provision therefore authorises a Member State to adopt measures of a temporary nature which are intended to deal with the consequences of the situation of its economy at a given time. Therefore, the application of measures referred to in that provision must be limited in time and cannot, by definition, be of a structural nature.

54It follows that the first sentence of Article 17(7) of the Sixth Directive does not authorise a Member State to adopt measures excluding goods from the system of deducting VAT which contain no indication as to their limitation in time and/or which form part of a body of structural adjustment measures whose aim is to reduce the budget deficit and allow State debt to be repaid (see Metropol and Stadler, paragraph 68).

55The answer to Question 1(b) and (c), first part, must therefore be that the first sentence of Article 17(7) of the Sixth Directive must be interpreted as not authorising a Member State to exclude goods from the system of deducting VAT without first consulting the VAT Committee. Nor does that provision authorise a Member State to adopt measures excluding goods from the system of deducting that tax which contain no indication as to their limitation in time and/or which form part of a body of structural adjustment measures whose aim is to reduce the budget deficit and allow State debt to be repaid.

Question 1(c), second part, and Question 2

56By those questions, the referring court essentially asks whether the national tax authorities may rely as against a taxable person on a provision derogating from the principle of the right to deduct VAT which was not established in accordance with Article 17(7) of the Sixth Directive.

Observations submitted to the Court

57The Commission submits that, according to settled case-law of the Court of Justice (see in particular Case C-62/93 BP Soupergaz[1995] ECR I-1883, paragraphs 16 to 18), the right to deduct is an integral part of the VAT scheme and confers in principle on the taxpayer a right which can only be subject to limitations established by the directive itself.

58When a national derogation from the principle of deductibility of VAT has been introduced by a Member State in breach of the Sixth Directive, the taxpayer is entitled to deduct the VAT paid on the goods in question covered by the national measure. The Court has, for example, ruled, in paragraph 64 of Metropol and Stadler, that in so far as an exclusion from the system of deductions has not been established in accordance with Article 17(7) of the Sixth Directive, which imposes a duty of consultation on the Member States, the national tax authorities may not rely as against a taxable person on a provision derogating from the principle of the right to deduct VAT set out in Article 17(1) of that directive.

59The Italian Government submits that, for the period 2000 to 2004, the compliance with the procedure laid down by Article 17(7) of the Sixth Directive, the favourable opinion given by the Commission concerning the requests for derogations, and the situation of the Italian economy at the relevant time, make it difficult not to apply the national legislation, and, therefore, to recognise the taxpayers' right of deduction.

60In the view of that government, Question 2 is doubly inadmissible. First, it refers to periods prior to the year 2000, which are not at issue in the main proceedings.

61Second, that question bears no relation to the situation in Italy between 2000 and 2004 in that it mentions a limitation of the deduction which is '[objective] and without limitation in time'. A first derogation was in fact granted until 31 December 2000 after consultation of the VAT Committee and the favourable opinion of the Commission. The second derogation for that period was requested with effect from 1 January 2001 and preceded by a favourable opinion from the Commission, which took the view that the measure could be justified until the adoption of the new directive.

62In any case, the Italian Government submits that the fact that the VAT Committee takes note of a national derogating measure after the adoption of that measure does not justify considering it as illegal, as the Court held, concerning Article 27 of the Sixth Directive, in paragraph 23 of Sudholz.

63Stradasfalti submits that Article 17(2) of the Sixth Directive precludes, in the case of infringement of Article 17(7) of that directive, a national provision hindering the total and immediate exercise by taxpayers of their right to deduct as regards tax paid on the purchase, use and maintenance of motor vehicles 'for tourism'.

Findings of the Court

— The admissibility of the question

64As stated in paragraph 46 of this judgment, refusal to give a preliminary ruling on a question submitted by a national court is only possible where it is quite obvious that the interpretation of Community law sought bears no relation to the actual facts of the main action or its purpose, where the problem is hypothetical, or where the Court does not have before it the factual or legal material necessary to give a useful answer to the questions submitted to it (Schneider, paragraph 22).

65In the present case, it is apparent from the observations submitted to the Court that although the dispute in the main proceedings only concerns VAT paid in the years 2000 to 2004, years in respect of which the requests for consultation of the VAT Committee, according to the Italian Government, preceded the adoption of the national measure extending the derogation, the latter entered into force before that period and was systematically renewed for several years. It therefore does not appear that the interpretation of Community law sought bears no relation to the facts of the main proceedings.

— Substance

66By virtue of the general duty stated in the third paragraph of Article 189 of the EC Treaty (now the third paragraph of Article 249 EC), Member States are bound to observe all the provisions of the Sixth Directive (see Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 33). In so far as an exception from the system of deductions has not been established in accordance with Article 17(7) of the Sixth Directive, the national tax authorities may not rely as against a taxable person on a provision derogating from the principle of the right to deduct VAT set out in Article 17(1) of that directive (see Metropol and Stadler, paragraph 64).

67In the main proceedings, and even though the Italian Government submits that the requests for consultation of the VAT Committee, in 1999 and 2000, preceded the adoption of the national measure extending the derogation from the principle of the right to deduct VAT, it is common ground that that provision, with minor amendments, was systematically renewed from 1980 by the Italian Government. Under those circumstances it cannot be said to be of a temporary nature, nor can it be considered to be based on cyclical economic reasons. That measure must, consequently, be regarded as forming part of a body of structural adjustment measures, which do not come within the scope of application of Article 17(7) of the Sixth Directive. Therefore the Italian Government may not rely on such measures to the detriment of taxable persons (see to that effect Metropol and Stadler, paragraph 65).

68A taxable person which has been subject to that measure must be able to recalculate its VAT debt in accordance with Article 17(2) of the Sixth Directive, in so far as the goods and services have been used for the purposes of taxable transactions.

69The answer to Question 1(c), second part, and Question 2 must therefore be that in so far as an exception from the system of deductions has not been established in accordance with Article 17(7) of the Sixth Directive, the national tax authorities may not rely as against a taxable person on a provision derogating from the principle of the right to deduct VAT set out in Article 17(1) of that directive. A taxable person which has been subject to that derogating provision must be able to recalculate its STRADASFALTl

VAT debt in accordance with Article 17(2) of the Sixth Directive, in so far as the goods and services have been used for the purposes of taxable transactions.

On the application to limit the temporal effects of the judgment

70The Italian Government has raised the possibility that the Court, if it takes the view that the derogations from the right to deduct in respect of the years 2000 to 2004 were not established in accordance with Article 17(7) of the Sixth Directive, might limit the temporal effects of the present judgment.

71In support of that request, the Italian Government refers to the serious consequences for public finances which could be caused by the Court's judgment and the legitimate expectation which it was entitled to entertain as to the compatibility with Community law of the measure in question. It observes in that respect that the Commission, in 1999 and 2000, gave a favourable opinion concerning the measures intended to be taken while waiting for the adoption of the directive which would regulate the matter in a homogeneous manner, and that the Commission has never made a complaint to the Italian Republic concerning the continuation of the derogation.

72It should be noted that it is only exceptionally that the Court may, in application of the general principle of legal certainty inherent in the Community legal order, be moved to restrict for any person concerned the opportunity of relying upon a provision which it has interpreted with a view to calling in question legal relationships established in good faith. In determining whether or not to limit the temporal effect of a judgment it is necessary to bear in mind that although the practical consequences of any judicial decision must be weighed carefully, the Court cannot go so far as to diminish the objectivity of the law and compromise its future application on the ground of the possible repercussions which might result, as regards the past, from a judicial decision (Case 24/86 Blaizot [1988] ECR 379, paragraphs 28 and 30, and Case C-163/90 Legros and Others [1992] ECR I-4625, paragraph 30).

73In the present case, although the Commission has supported the Italian authorities in respect of the years at issue in the main proceedings, it is nevertheless clear from the observations submitted to the Court that the VAT Committee has repeatedly pointed out to the Italian Government, since 1980, that the derogation in question could not be justified on the basis of Article 17(7) of the Sixth Directive, and that the more conciliatory attitude adopted by that committee during its meetings of 1999 and 2000 was a result of the Italian authorities' undertaking to re-examine the measure before 1 January 2001 and the possibilities presented at that time by the Commission's proposal to amend the Sixth Directive as regards the right to VAT deduction.

74Under those circumstances, the Italian authorities could not be unaware that the systematic renewal, since 1979, of a derogating measure which was supposed to be temporary and which could only be justified, under the very wording of Article 17(7) of the Sixth Directive, by 'cyclical economic reasons', was not compatible with that article.

75The Italian authorities cannot therefore invoke the existence of legal relationships established in good faith in order to ask the Court to limit the temporal effects of its judgment.

76Moreover, the Italian Government has not been able to demonstrate the soundness of the calculation which led it to argue before the Court that the present judgment might, if its temporal effects were not limited, entail significant financial consequences.

- There is therefore no need to limit the temporal effects of the present judgment.

Costs

78Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Third Chamber) hereby rules:

1. The first sentence of Article 17(7) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment requires the Member States, in order to respect the procedural obligation of consultation laid clown by Article 29 of that directive, to inform the Advisory Committee on value added tax established by that article that they intend to adopt a national measure derogating from the general system of deducting value added tax and to provide that committee with sufficient information to enable it to examine the measure in full knowledge of the facts.

2. The first sentence of Article 17(7) of Sixth Directive 77/388 must be interpreted as not authorising a Member State to exclude goods from the system of deducting value added tax without first consulting the Advisory Committee on value added tax established by Article 29 of that directive. Nor does that provision authorise a Member State to adopt measures excluding goods from the system of deducting that tax which contain no indication as to their limitation in time and/or which form part of a body of structural adjustment measures whose aim is to reduce the budget deficit and allow State debt to be repaid.

3. In so far as an exception from the system of deductions has not been established in accordance with Article 17(7) of the Sixth Directive, the national tax authorities may not rely as against a taxable person on a provision derogating from the principle of the right to deduct value added tax set out in Article 17(1) of that directive. A taxable person which has been subject to that derogating provision must be able to recalculate its value added tax debt in accordance with Article 17(2) of the Sixth Directive 77/388, in so far as the goods and services have been used for the purposes of taxable transactions.

[Signatures]

OPINION OF ADVOCATE GENERAL

SHARPSTON delivered on 22 June 2006 1

Introduction

1In the present request for a preliminary ruling, the Commissione Tributaria di Primo Grado (First Instance Tax Court), Trento, Italy, wishes in essence to know whether national rules precluding deduction of input VAT on motor vehicles which are not intrinsic to the taxable person's business activity as such, or on fuel for such vehicles, may be justified on the basis of Article 17(7) 2 of the Sixth VAT Directive, which allows total or partial exclusion of some goods from the deduction system for cyclical economic reasons and subject to consultation of the VAT Committee, in circumstances in which the rules have been maintained in force for 25 years and the VAT Committee has merely taken note of their adoption.

1 — Original language: English.

2 — Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, amended on numerous occasions; hereinafter 'the Sixth Directive'). Relevant provisions of the Sixth Directive

2Pursuant to Article 17(2) of the Sixth Directive, essentially, input VAT on supplies acquired by a taxable person is to be deductible from his output tax in so far as those input supplies are used for the purposes of his taxable output supplies.

3Article 17(6) provides, however:

'Before a period of four years at the latest has elapsed from the date of entry into force of this Directive, the Council, acting unanimously on a proposal from the Commission, shall decide what expenditure shall not be eligible for a deduction of value added tax. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.

Until the above rules come into force, Member States may retain all the exclusions provided for under their national laws when this Directive comes into force.'

4In fact, no such rules have yet been adopted. The Sixth Directive came into force in Italy on 1 January 1979. 3

5Article 17(7) of the Sixth Directive provides:

'Subject to the consultation provided for in Article 29, each Member State may, for cyclical economic reasons, totally or partly exclude all or some capital goods or other goods from the system of deductions. ...'

3 — Article 1 of Ninth Council Directive 78/583/EEC of 26 June 1978 on the harmonisation of the laws of the Member States relating to turnover taxes (OJ 1978 1. 194. p. 16).

6Article 27 provides for a different, and more permanent, type of derogation. At the material time, 4 that provision read as follows:

'1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. ...

2. A Member State wishing to introduce the measures referred to in paragraph 1 shall inform the Commission of them and shall provide the Commission with all relevant information.

3. The Commission shall inform the other Member States of the proposed measures within one month.

4. The Council's decision shall be deemed to have been adopted if, within two months of the other Member States being informed as laid down in the previous paragraph, neither the Commission nor any Member State has requested that the matter be raised by the Council.

4 — Before it was modified with effect from 19 February 2004 by Council Directive 2004/7/EC of 20 January 2004 amending Directive 77/388/EEC concerning the common system of value added tax. as regards conferment of implementing powers and the procedure for adopting derogations (OJ 2004 L 27. p. 44).

7Article 29, referred to in Article 17(7), provides:

'1. An Advisory Committee on value added tax, hereinafter called "the Committee", is hereby set up.

2. The Committee shall consist of representatives of the Member States and of the Commission. The chairman of the Committee shall be a representative of the Commission. Secretarial services for the Committee shall be provided by the Commission.

3. The Committee shall adopt its own rules of procedure.

4. In addition to points subject to the consultation provided for under this Directive, the Committee shall examine questions raised by its chairman, on his own initiative or at the request of the representative of a Member State, which concern the application of the Community provisions on value added tax.'

The Metropol judgment

8In Metropol and Stadler 5 the Court had to consider the provisions of Article 17(6) and, more particularly, 17(7) in the context of a request for a preliminary ruling from the Austrian Verwaltungsgerichtshof (Supreme Administrative Court), with regard to a national provision introduced after the Sixth Directive came into force in Austria. That national provision redefined a category of minibus much more narrowly than had been the case in previous administrative practice and thereby excluded from deduction the input VAT on certain vehicles which had previously given rise to a right to deduct.

9After establishing that the change of definition could not be justified under Article 17(6) of the Sixth Directive, because it represented a substantive change in binding rules as compared with the situation before the directive came into force in Austria, the Court went on to examine whether Article 17(7) authorised a Member

5 - Case C-409/99 [2002] ECR I-81.

State to exclude goods from the system of VAT deductions (a) without first consulting the VAT Committee, and (b) without limitation in time, in order to consolidate its budget.

10First, the Court noted that the right of deduction is an integral part of the VAT scheme, ensuring the neutrality of that tax. In principle, therefore, it may not be limited. Derogations are permitted only in the cases expressly provided for in the Sixth Directive, which are to be interpreted strictly. Article 17(7) is one of those cases, giving Member States the right to exclude goods from the deduction system, subject to the consultation provided for in Article 29.

11That consultation enables the Commission and the other Member States to control the use by a Member State of the possibility of derogating from the general system of deducting VAT, by checking in particular whether the national measure in question satisfies the condition of adoption for cyclical economic reasons.

12Article 17(7) thus lays down a procedural obligation which the Member States must observe in order to be able to make use of the derogation it sets out. Consultation of the VAT Committee is a condition precedent to the adoption of any measure on the basis of that provision. If an exclusion from the system of deductions has not been established in accordance with that condition, the national tax authorities may not rely on the exclusion to the detriment of taxable per 6 sons.

13Second, the first sentence of Article 17(7) of the Sixth Directive authorises Member States to exclude goods from the system of deductions for 'cyclical economic reasons', that is to say, to adopt measures of a temporary nature intended to cope with the temporary situation of its economy at a given moment. Application of such measures must therefore be limited in time and, by definition, they may not be of a structural nature. It follows that Article 17(7) does not authorise a Member State to adopt measures excluding goods from the system of deducting VAT which contain no indication as to their limitation in time and/or which form part of a package of structural adjustment measures whose aim is to reduce the budget deficit and allow State debt to be repaid. 7

6 — See paragraphs 58 to 65 of the judgment.

7 — Sec paragraphs 66 to 68 of the judgment.

Relevant national provisions

14The provisions in dispute in the present case appear in Article 19-bis-1 of Decreto del Presidente della Repubblica No 633 of 26 October 1972 ('DPR 633/1972').

15Under paragraph 1(c) of that article, in derogation from the general rule of deductibility of input tax from output tax, VAT on the purchase or importation of certain types of motor vehicle which are not intended for public use and which are not intrinsic to the 8 taxable person's business activity as such, may in principle not be deducted other than by commercial agents or representatives, although it appears that 50% could be 9 deducted until 1983. Since 1 January 2001, 10% of the input tax on vehicles acquired under leasing arrangements, and 50% of that on vehicles not powered by internal combus 10 tion, may again be deducted. The Italian Government stated at the hearing that the 10% deduction had been increased to 15% as from 1 January 2006.

16Under paragraph 1(d), VAT on the purchase or importation of fuel and lubricants for any vehicle may be deducted only to the extent that VAT on the purchase or importation of the vehicles themselves is deductible.

17What is now Article 19-bis-1 was introduced into the original text of DPR 633/1972 (as the new text of Article 19) in 1979, after the Sixth Directive came into force in Italy. 11 It has since been amended and its period of validity (originally until 31 December 1983) has been extended on a number of occasions — 24, according to the Commission — with the result that it is still in force today.

18It appears from the submissions and documents presented to the Court that the measure in question has been the subject of a number of consultations of the VAT Committee. At the hearing it was further stated that the Commission had decided on 12 October 2005 — thus, after the lodging of all the written observations in this case — to send Italy a letter of formal notice pursuant to Article 226 EC concerning that measure, and that Italy had subsequently initiated the procedure for obtaining Council authorisation under Article 27 of the Sixth Directive.

8 — '[C]he non formano oggetto dell'attività propria dell'impresa'. This appears to cover vehicles used in an ancillary capacity in the pursuit of any business activity, as opposed to those which form the very basis of that activity (such as car hire).

9 — Article 30(4) and (5) of Legge No 388 of 2000.

10 — This appears to concern principally electrically-propelled vehicles.

11 — By Article 1 of Decreto del Presidente della Repubblica No 24 of 31 March 1979 ('DPR 24/1979'), with effect from 1 April 1979.

The reference for a preliminary ruling

19Stradasfalti Sri ('Stradasfalti') is a company which carries out road works. It has bought motor cars (of a 'private' rather than a 'commercial' kind) for its staff to use to travel between worksites and offices, to visit various administrations, and to enjoy as a 'fringe benefit'.

20It objects to the limitation on the deductibility of input tax on those vehicles and the fuel for them. In 2004 it therefore decided to seek reimbursement of such VAT in respect of the years 2000, 2001, 2002, 2003 and 2004, totalling EUR 31 337.21.

21On 15 July 2004, the local tax office rejected those claims. Stradasfalti has challenged the rejections before the referring court.

22Having regard to the arguments before it — in which Stradasfalti submits that the contested provisions are contrary to the Sixth Directive and the tax office contends that Member States are entitled to exclude from deduction goods which are not inherent to the taxable person's business activity — and to the Court's judgment in Metropol, the national court has requested a preliminary ruling on the following questions:

'(1) Is the first sentence of Article 17(7) of Sixth Council Directive 77/388/EEC of 17 May 1977, in relation to paragraph 2 of that article, on the harmonisation of the laws of the Member States on turnover taxes, to be interpreted as:

(a) precluding from being treated as "consultation of the VAT Commit tee", for the purposes of Article 29 of that directive, the mere notification by a Member State of the adoption of a rule of national law, like the present Article 19-bis-1[(1)] (c) and (d) of Presidential Decree No 633/1972, as subsequently extended, which restricts the right of VAT deduction in respect of the use and maintenance of goods under Article 17(2), on the basis that the VAT Committee has merely taken note of it;

(b) also precluding from being treated as a measure falling within its scope any restriction whatsoever of the right to deduct VAT connected to the purchase, use and maintenance of the goods referred to in (a) introduced before the consultation of the VAT Committee and maintained in force by means of various legislative extensions adopted in unbroken succession for more than 25 years;

(c) if the answer to 1(b) is in the affirmative, the Court is asked to provide guidelines for determining the maximum period, if any, for such extensions on grounds of cyclical economic reasons referred to in article 17(7) of the Sixth Directive, or else to state whether the failure to observe the temporary nature of the derogations (repeated over time) confers on the tax payer the right to deduct.

(2) If the requirements and conditions for the procedure under Article 17(7) referred to above have not been complied with, the Court of Justice is asked to state whether Article 17(2) of that directive is to be interpreted as precluding a rule of national law or an administrative practice adopted by a Member State after the entry into force of the Sixth Directive (1 January 1979 for Italy) which, objectively and without limitation in time, restricts VAT deduction in respect of the purchase, use and maintenance of certain motor vehicles.'

23Written observations have been submitted by Stradasfalti, the Italian Government and the Commission, all of whom also presented oral argument at the hearing on 6 April 2006.

Assessment

Admissibility

24The Italian Government submits that questions 1(b) and 2 are not relevant to the dispute in the main proceedings in so far as they refer to legislation other than that in force during the years (2000 to 2004) in respect of which Stradasfalti seeks reimbursement of input tax, and that the first part of question 1(c) is hypothetical in so far as it presupposes an affirmative answer to question 1(b).

25Those questions are thus in its view inadmissible in accordance with the Court's judgment in Längst, 1 to the effect that the Court may decline to rule on a question referred by a national court if the interpretation sought bears no relation to the facts of the main action or its purpose, or if the problem is hypothetical.

26Underlying the objection to the admissibility of question 1(b) is Italy's assertion that, although in earlier years the legislation embodying the measure in issue may have been enacted or re-enacted before consultation of the VAT Committee, each amendment or extension since 1999 (and thus in respect of the period 2000 to 2004) has been adopted after consultation of the committee.

27I note however that the question is phrased in entirely general terms. Nothing in the order for reference refers to any specific period or mentions any specific consultation of the VAT Committee, whether before or after adoption of a measure. By contrast, Stradasfalti, the Italian Government and the Commission have all referred to various consultations and have all produced minutes of committee meetings, some preceding and some following the adoption of the measure in question.

12 - Case C-165,03 [2005] ECR I-5637. paragraphs 30 to 33. in particular paragraph 32.

28It seems clear that the question of Italy's compliance with the requirements of consultation of the VAT Committee must be determined on the basis of the specific steps taken on each occasion. That, however, is a question of fact and can therefore be decided only by the national court. It is not for this Court to establish facts in the context of a reference for a preliminary ruling, even when those facts concern a Community procedure.

29In that light, it seems to me perfectly admissible for the referring court to seek in general terms a preliminary ruling in the light of which it will assess such facts as it will ascertain or has already ascertained with regard to consultation of the VAT Commit-3 tee. 1

30Likewise, since that court needs to know what does or does not constitute valid consultation, it is in my view legitimate for this Court to take account of the various situations revealed by the documents produced, whilst refraining from making any specific finding of fact such as to determine the outcome of the main proceedings on the basis of those documents.

13 — The order for reference is not explicit as to what facts, if any. have already been ascertained, but the file forwarded to the Court contains a number of the minutes of VAT Committee meetings referred to above.

31Nor can question 1(b) be dismissed as irrelevant simply because it refers to 'various legislative extensions adopted in unbroken succession for more than 25 years', whereas in the main proceedings deduction is claimed in respect of a shorter period.

32Regardless of whether the requirements of consultation were fulfilled or not, the 'unbroken succession' referred to may be relevant to assessing whether there has been compliance with the requirement in Article 17(7) of the Sixth Directive that any exclusion from the deduction system must be based on 'cyclical economic reasons'.

33If question 1(b) is thus admissible — as in my view it is — the Italian Government's objection that question 1(c) is hypothetical has no basis.

34With regard to the admissibility of question 2, Italy's objection is based on its argument that, for the period subsequent to 1999, the validity of the disputed measures was not 'without limitation in time' but was extended from year to year pending the adoption of a directive on rules governing the right to deduct. Italy therefore claims that the question is without relevance for the dispute in the main proceedings.

35It is true that in 1998 the Commission submitted a proposal for a Council Directive amending Directive 77/388/EEC as regards the rules governing the right to deduct value 14 added tax. That proposal has very recently been withdrawn, 15 apparently following difficulty in reaching agreement within the Council. Article 1(2) of that proposal would have inserted an Article 17a into the Sixth Directive, dealing inter alia with deduction of VAT on 'expenditure relating to passenger cars which are not used solely for business purposes', on which Member States could have set a ceiling of not less than 50% of the tax in question. It is also true that mention is made of that proposal in the minutes of the VAT Committee produced by the Italian Government.

36However, from the context of the reference for a preliminary ruling it seems to me that question 2 is not to be read narrowly as concerning only situations in which no actual limitation in time is set for the validity of a measure, but rather as

14 — COM(1998) 377 final (OJ 1998 C 219 p. 16).

15 — See OJ 2006 C 64, p. 3, at p. 9.

concerning all situations in which validity is so extended as to be likely to conflict with the requirement that the derogation be for 'cyclical economic reasons'.

37I therefore see no ground for finding any of the questions referred inadmissible.

38In answering them, I shall adopt an approach similar to that proposed by the Commission. I therefore deal first with the procedural requirements for the validity of a derogation under Article 17(7) of the Sixth Directive (question 1(a) and part of question 1(b)), then with the substantive requirements for such validity (the remainder of question 1(b) and the first part of question 1(c)), and finally with the legal consequences of a failure to observe either type of requirement (the remainder of question 1(c), and question 2).

Procedural requirements — questions 1(a) and (b)

39The national court wishes to know, essentially, whether 'mere notification of the adoption of a measure' can constitute 'consultation' of the VAT Committee when the committee simply 'takes note' of it; and what is the effect, if any, of consultation subsequent to adoption of the measure in question.

40At one level, a very straightforward answer can be given to the first of those questions.

41The VAT Committee is an advisory body. Whilst it may adopt 'guidelines', it is not obliged to do so unless the question is one of general interest and a particular view is shared by a clear majority of Member 16 States. An obligation to consult the committee is imposed by Article 17(7) of the Sixth Directive on a Member State which wishes to introduce an exclusion from deduction pursuant to that provision. By contrast, no condition is imposed as to the outcome of the consultation. If moreover there is no obligation on the VAT Committee, once consulted, to adopt any particular position (as there is not), the validity of the derogating measure cannot be called into question simply because the committee has 'merely taken note' of it.

42Furthermore, Article 12(3) of the VAT Committee's Rules of Procedure specifically

16 — Article 4(2) of the VAT Committee's Rules of Procedure. provides for the committee to 'take note' of a consultation which a Member State is obliged to make under the Sixth Directive. The fact that the committee does so — and it appears from the minutes produced before the Court that it has on several occasions taken note of Italy's consultation with regard to the disputed measure — cannot thus in itself impinge on the validity of that consultation.

43However, question 1(a) refers to 'mere notification ... of the adoption of a rule of national law'. It may perhaps thus be read as asking whether consultation can be said to have taken place when the committee merely takes note of the notification of a measure already adopted.

44That in turn raises two further questions: what is needed in a 'notification' for it to constitute 'consultation'; and whether consultation after the adoption of a measure is a valid consultation or can have any effect (a matter also alluded to in question 1(b)).

45On the first of those questions, it seems to me that the Commission is quite right in saying, essentially, that the Member State must communicate to the committee sufficient information for the other Member States and the Commission to be able to express a view as to whether the measure meets the substantive criteria laid down in Article 17(7). As the Court stated in Metropol, 'consultation enables the Commission and the other Member States to control the use by a Member State of the possibility of derogating from the general system of deducting VAT, by checking in particular whether the national measure in question satisfies the condition of adoption for cyclical 17 economic reasons'. Any lesser requirement as to the content or extent of the notification required would deprive the procedure of any usefulness whatever.

46Whether sufficient information was provided in the consultations in issue is a question of fact, to be determined by the national court. It is none the less noteworthy that a number of the documents annexed by both the Italian Government and the Commission to their observations to the Court indicate that discussion on Italy's consultation did take place within the committee and that the Commission was able to express a view on the measures concerned.

47As regards the second question, the judgment in Metropol clearly states that

17 — Paragraph 61 of the judgment.

consultation of the VAT Committee is a 'condition precedent' for adoption of a 18 derogating measure.

48The Italian Government nevertheless places reliance upon the Court's subsequent 19 statement in Sudholz that 'the wording of Article 27 of the Sixth Directive does not preclude the Council's decision being adopted a posteriori. The decision is not invalid solely by reason of the fact that it was adopted after the derogating measure.'

49In that regard, I would point out that the consultation procedure set up by Article 17(7) differs from the authorisation proce 20 dure in Article 27. It may therefore not be possible or appropriate to draw a full analogy between the two. The aim of consultation is generally most likely to be achieved when it precedes the adoption of a course of action, because it may thus influence the steps actually taken. In contrast, authorisation may still serve to validate the course of action as taken, even if it is accorded retroactively.

50Moreover, even if an analogy is appropriate, it should be noted that in Sudholz the

18 — Paragraph 63 of the judgment.

19 - Case C-17/01 12004] ECR I 1243. paragraph 23.

20 — See point 6 above.

Court did not in fact accept that authorisation under Article 27 could be granted with retroactive effect. Rather, it decided that the authorisation there in issue, granted after the adoption of the measure concerned, was not invalid because of its timing but could legitimise the measure only as from the time it was granted.

51In addition, the passage cited by the Italian Government concerned the timing of the Council's authorisation rather than of the application for that authorisation — which, it seems clear, must precede adoption of the derogating measure. The Court stated that 'Article 27 specifies various stages in the procedure leading to the adoption of a decision by the Council, and requires in particular that the Member State concerned 21 inform the Commission of its desire to introduce a derogating measure, but that no time-limit is laid down as regards the timing of the adoption by the Council of its 22 decision'.

52If an analogy is to be drawn, therefore, it would seem sensible to regard the initiation of a consultation pursuant to Article 17(7) as the equivalent of application for authorisation pursuant to Article 27; and thus as

21 — The French version of tile judgment makes it even dearer by its use of the word 'préalable', that the information must precede the introduction of the measure 22 — Paragraph 22 of the judgment. See also point 3') of Advocate General Geelhoed's first Opinion in the case.

having to precede adoption of the measure in question. The position, if any, taken by the VAT Committee could however be subsequent to adoption without affecting the validity of the measure on procedural grounds.

53The Commission makes the further point that the very nature of cyclical requirements usually means that action must be taken rapidly, and that meetings of the VAT Committee are relatively infrequent. A derogation might thus have to be introduced before the committee could discuss it.

54However, it does not seem to me likely that the need to exclude certain goods from the deduction system can ever be so urgent as to preclude first at least initiating the consultation procedure by notifying the VAT Committee of the Member State's intention. In any event, the committee's Rules of 23 Procedure state that it is to meet in principle four times a year; and the Commission agreed at the hearing that it was possible (at least in theory) to call an extraordinary meeting of the committee in circumstances of urgency.

55Nor, indeed, does it seem to be suggested in the present case that Italy on any occasion adopted any relevant legislative act between

23 — Article 5(1).

the moment when it initiated a consultation of the VAT Committee and the moment when that committee was able to discuss the matter, or that it was on any occasion obliged to act with urgency before a meeting of the committee could take place.

56If the VAT Committee must in principle be consulted before adoption of the measure in issue, are there any circumstances in which a subsequent consultation can none the less produce any effect?

57The national court refers in question 1(b) to a restriction introduced before consultation of the committee. Stradasfalti states that, although the disputed measure was first introduced in 1979, the first consultation of the committee was not until 1981. Italy points out that the measure has been re-enacted on several occasions since then.

58It seems to me clear that, even if consultation is a condition precedent to the adoption of any measure on the basis of Article 17(7), failure to fulfil that condition in a particular instance cannot preclude for all time any subsequent adoption of an identical or similar provision following due consultation.

59In my view, it is therefore necessary to look at each legislative act (be it enactment, re-enactment, extension of validity or amendment of a measure) and determine (a) whether the VAT Committee was consulted before its adoption and (b) whether on that occasion sufficient information of the specific content of the measure was given for the other Member States and the Commission to be able to form a view as to whether that measure met the substantive criteria laid down in Article 17(7).

60On that basis, it will be possible for the national court to determine which of the various legislative acts embodying the disputed measure in its successive forms complied with the procedural requirements of Article 17(7), and which did not.

61I am therefore of the view that consultation of the VAT Committee by a Member State is a condition precedent to adoption of each (successive) legislative act embodying an exclusion from the right to deduct pursuant to Article 17(7) of the Sixth Directive. The consultation must involve providing sufficient information as to the specific content of the exclusion for the other Member States and the Commission to be able to form a view as to whether it meets the substantive criteria laid down in Article 17(7).

Substantive requirements — questions 1(b) and 1(c)

62The national court wishes to know, essentially, whether a measure kept in force for 25 years can be justified on the basis of Article 17(7) of the Sixth Directive; and, if not, for what length of time a derogating measure may validly be extended for cyclical economic reasons.

63It is clear from Metropol 24 — and indeed from the wording of the provision — that Article 17(7) of the Sixth Directive can authorise only temporary measures responding to a temporary (cyclical) economic 25 situation.

64Furthermore, it seems to me very difficult, if not frankly impossible, to describe a measure which applies for 25 years as 'temporary', or an economic situation which lasts for 25 years as temporary, short-term or cyclical. Twenty-five years amount to more

24 — In particular paragraph 67 of the judgment.

25 — It might be queried however whether 'cyclical economic reasons' exactly comevs in English the sense of 'raisons '

conjoncturelles, 'Koniunkturgrundcn', 'konjunkturmaessige grunde', 'motivi congiunturali', and 'conjuncturele redenen' in the other official languages in which the Sixth Directive was adopted in 1977. The term 'cyclical' might be thought to be linked to the normal economic cycle, whereas the other terms might suggest simply a temporary (and exceptional) combination of circumstances. Sec further point 75 below. than half of the lifetime of the European (Economic) Community, and practically the whole of the period during which the Sixth Directive has been in force in Italy.

65The Italian Government however seeks to confine the Court's assessment to the five year period from 2000 to 2004.

66I cannot agree that the validity of a measure purportedly justified for 'cyclical economic reasons' must be determined by reference only to the period material to its application to the facts in the national proceedings. The total length of time for which the measure remains in force is clearly also relevant when assessing whether the justification is made out. In my view, a period of 20 or 25 years is equally clearly too long to meet the criterion.

67The situation would of course be different if a series of successive measures were to be implemented, each responding in a different way to a series of different cyclical economic circumstances. In view of the fact that the measure in issue in the present case has been renewed in various ways since it was first introduced in 1979, the national court must satisfy itself that such is not the case. That is a question of fact for that court to decide, but the Court of Justice may none the less provide a degree of guidance.

68First, it appears that very few changes have been made to the disputed measure. The Court has been informed only of the existence of a partial right of deduction at certain periods — 50% between 1979 and 1983,10% from 2001 to 2005 (50% in respect of a limited category of vehicles) and now 15% since the beginning of 2006. There appears to have been no right to deduction whatsoever for the 18 year period from 1983 to 2000 inclusive. Thus, the proportion of VAT which may or may not be deducted has occasionally varied, but the nature of the measure as an exclusion from deduction appears to have remained unchanged and uninterrupted since it was first introduced.

69Second, although in theory it might be possible to imagine a series of successive short-term economic situations, each of which required limitation — by a different percentage — of the right to deduct input VAT on motor vehicles, no such series has been alleged to exist in the present case.

70It therefore seems reasonable to conclude, unless convincing evidence to the contrary is presented to the national court by the tax authorities, that the disputed measure is neither temporary in nature nor based on temporary, short-term or cyclical economic reasons and consequently that it cannot fulfil the substantive requirements for justification under Article 17(7) of the Sixth Directive.

71The referring court also requests guidance as to the maximum period for which an exclusion from deduction justified under that provision may be extended.

72Although a period of 20 or 25 years appears manifestly too long, I do not think it is sensible (or possible) to propose any specific time-limit. The relevant criterion lies in the nature of the economic situation giving rise to a need for exclusion from the right to deduct, rather than in the specific duration of the situation. (The exclusion itself, of course, clearly cannot be justified for longer than the duration of the circumstances which render it necessary.)

73Stradasfalti refers to the Commission's submission in Metropol that only 'periods of substantial divergence from the normal economic cycle' are concerned, 26and to Advocate General Geelhoed's view in the same case that: 'The "cyclical economic reasons" requirement means that the fiscal measure must be aimed at counteracting cyclical fluctuations. The measure forms part of the economic policy of a Member State. In this context, I understand economic policy to mean the influencing, through the government budget, of macroeconomic quantities such as production, consumption and import/export volumes over short periods of time, often no more than one or two years in 2 length.' 7

74Both of those explanations appear to me to add an apposite and helpful gloss on the Court's statement in its judgment that Article 17(7) 'authorises a Member State to adopt measures of a temporary nature intended to cope with the temporary situation of its economy at a given moment. Application of the measures referred to in that provision must therefore be limited in time and, by definition, they may not be of a 2 structural nature.' 8 The criteria indicated may be used by a national court when

26 — See paragraph 57 of the judgment. This accords with the concept, reflected in the phrase 'raisons conjoncturelles' and the equivalent in other languages, of a significant divergence from the normal trend of economic performance. That may in turn imply that the bare use of the term 'cyclical' is misleading in the English version of the Sixth Directive. 27 — Point 60 of the Opinion. 'Economic policy' in the second and third sentences is 'conjunctuurpolitiek' in the original, and 'cyclical fluctuations' is 'schommelingen in de conjunctuur' 28 — Paragraph 67 of the judgment.

assessing whether a measure meets the substantive requirements for justification under Article 17(7), even if no precise time limit can be put on what is 'temporary' in that context.

75I would add that some degree of fluctuation around an underlying trend is a normal feature of economic performance. It seems to me that the draftsman of Article 17(7) cannot have intended that normal phenomenon to give rise to a right for a Member State to derogate from the basic entitlement of a taxable person to deduct input tax in accordance with Article 17(2) of the Sixth Directive. Rather, it seems to me that Article 17(7) — which is, after all, to be 29 construed strictly — must refer to a rather more serious or significant divergence from the trend, such as would legitimately prompt the adoption of measures to prevent the aggravation of the economic cycle.

76I am therefore of the view that Article 17(7) of the Sixth Directive must be interpreted as capable of authorising only temporary measures responding to short-term economic circumstances. A measure maintained in force for a period exceeding the duration of such circumstances, without substantial modification such as to respond to a changed economic situation, cannot be authorised under that provision.

Legal effects of failure to comply with requirements — questions 1(c) and 2

77The national court asks whether failure to have regard to the temporary nature of an exclusion from deduction based on Article 17(7) of the Sixth Directive can confer on taxable persons a right to deduct, and whether application of the exclusion is precluded by Article 17(2).

78It is evident that, if a national measure providing for the exclusion of certain goods from the right to deduct input VAT was not validly adopted in compliance with the requirements of the Sixth Directive, the rules contained in that measure cannot be applied. What rules, then, must be applied in their stead?

79The Sixth Directive, like all harmonising directives, requires Member States to bring certain provisions into force but is not itself directly applicable. However, the Court has 29 — See Metropol and Stadler, cited in footnote 5, paragraph 59. consistently held that individuals may rely on those of its provisions which are clear, precise and unconditional. In particular, the provisions of Article 17(1) and (2), establishing the right to deduction, have been held to confer rights on individuals on which they may rely before a national court. 30

80Moreover, a taxable person 'who has completed his VAT return for a tax period using the method laid down by the national rules which transpose the Sixth Directive into domestic law may recalculate his VAT liability in accordance with the method held by the Court to comply with Community law, under the conditions laid down by national law, which have to observe the principles of equivalence and effectiveness' 31 — 'that is to say, they must not be less favourable than those relating to similar claims founded on provisions of domestic law or framed so as to render virtually impossible the exercise of rights conferred by the Community legal order'. 32

81Thus, if a national measure excluding certain goods from the deduction system has

30 - See. for example. Case C 62/93 BP Soupergaz [1995] ECU I-1883. paragraph 3b: Case C-150/99 Stockholm Lmdopark [2001] ECR 1-193. paragraph 32.

31 — Case C-291 03 MyTravel [2005] ECR [-8477. paragraph 18 32 — Ibid., paragraph 17.

not been validly adopted, a taxable person affected by the exclusion may recalculate his VAT liability in accordance with Article 17(2), entailing an immediate right to deduction.

82However, Article 17(2) contains the limitation 'in so far as the goods and services are used for the purposes of his taxable transactions'. In view of the fact that in the present case Stradasfalti is specifically stated to have allowed the cars in question to be used by staff as a 'fringe benefit', account must also be taken of:

— Article 17(5), which provides: 'As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions' (this is to be read in conjunction with Article 19, which sets out detailed rules for the calculation of the deductible portion); and

— Article 5(6), which provides: 'The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. ...'

83Consequently, in a case such as that of Stradasfalti, the right to deduct must in any event be limited to the extent to which the vehicles in question (and the fuel consumed by them) were used for the purposes of making taxable output supplies. Any necessary calculations must be established in accordance with the conditions laid down by national law, which have to observe the principles of equivalence and effectiveness.

Possible limitation of the temporal effects of the judgment

84Finally, the Italian Government has requested the Court, should it deliver a ruling from which it follows that the disputed national measure is invalid, to limit the temporal effect of its judgment.

85The Court has most recently stated its 33 approach to such requests in Skov, as follows:

'According to settled case-law, the interpretation which the Court, in the exercise of the jurisdiction conferred upon it by Article 234 EC, gives to a rule of Community law clarifies and where necessary defines the meaning and scope of that rule as it must be, or ought to have been, understood and applied from the time of its coming into force. It follows that the rule as thus interpreted can, and must, be applied by the courts even to legal relationships arising and established before the judgment ruling on the request for interpretation, provided that in other respects the conditions for bringing before the courts having jurisdiction an action relating to the application of that rule are satisfied ...

It is only exceptionally that the Court may, in application of the general principle of legal certainty inherent in the Community legal order, be moved to restrict for any person concerned the opportunity of relying on a provision which it has interpreted with a view to calling in question legal relationships established in good faith. Two essential

33 — Case C-402/03 [2006] ECR I-199, paragraphs 50 and 51. criteria must be fulfilled before such a limitation can be imposed, namely that those concerned should have acted in good faith and that there should be a risk of serious , 34 difficulties ...

86If the Italian Government's request is to be granted, it is therefore first necessary for the criterion of 'good faith' to be met. This is 35 stated more explicitly in Bidar to imply the existence of a 'large number of legal relationships entered into in good faith on the basis of rules considered to be validly in force and where it appeared that both individuals and national authorities had been led into adopting practices which did not comply with Community legislation by reason of objective, significant uncertainty regarding the implications of Community provisions, to which the conduct of other Member States or the Commission may even have contributed'.

87I admit to wondering whether 'objective, significant uncertainty' is the most appropriate phrase in this context. Should the existence of significant uncertainty not exhort a Member State to exercise caution, rather than to embrace a convenient assumption as to the correct interpretation of Community law?

34 — That is to say. serums economic repercussions for the Member State concerned (See Case C-209 03 Bidar [2005] ECU I-2119, paragraph 69).

35 — Cited in footnote 34. paragraph 69.

88It seems to me that it would be preferable to refer to 'objective, significant reasons for believing that the interpretation followed was correct', or even to apply criteria similar to those referred to by the Court in its case-law on State liability, such as whether the infringement was intentional or involuntary, whether any error of law was excusable or inexcusable, or whether the position taken by a Community institution 36 may have contributed to the infringement.

89Both temporal limitation of the effect of a judgment and a finding of State liability are, after all, exceptions to the normal rules. They arise in response to an exceptional situation. The criteria used to determine whether they are appropriate in a given case should therefore reflect this. Moreover, since the two concepts address situations that lie, respectively, at the 'good' and the 'bad' end of the spectrum of behaviour by a Member State, it seems to me that a certain parallelism in the formulation of the criteria for assessing the Member State's conduct may be appropriate.

90Be that as it may, the situation in the present case does not seem to me to support even the view that there was objective,

36 — See. for example, Joined Cases C-46/93 and C-48 93 Brasserie du Pécheur and Factortame [1996] ECR I-1029. paragraph 56.

significant uncertainty as to the correct approach for Italy to follow.

91On the one hand, the need for 'cyclical economic reasons' and the need to consult the VAT Committee are clear from the wording of Article 17(7) of the Sixth Directive.

92On the other hand, the Commission has produced VAT Committee documents which indicate that it has repeatedly expressed disapproval of the measure in issue and explained why. Its favourable reception of certain communications, remarked on by the Italian Government, concerned either the commitments to bring the derogation to an end, or the introduction of partial deductibility in 2001. There is no suggestion that the Commission has ever stated that the disputed measure seemed compatible with the Sixth Directive, or that other Member States have ever expressly approved Italy's course of action in enacting or re-enacting that measure.

93It is true that the Commission did not initiate proceedings against Italy with regard to the disputed measure, pursuant to Article 226 EC, until after the reference for a preliminary ruling was made in the present case. However, I do not consider that merely refraining from initiating such proceedings (which the Court has always held to be a 37 matter in the Commission's discretion ) can be considered to negate its express disap proval in the VAT Committee. There appears to be no case in which the Court has accepted that the Commission's failure to bring infringement proceedings has, by itself, been sufficient to justify a temporal limitation on the effects of a judgment, by leading a Member State to hold in good faith a mistaken view of Community law. Such a situation can clearly be distinguished from that in Legros, for example, in which the Commission initiated infringement proceedings but then did not pursue them, proposing instead a Council decision approving the 38 local tax in question, or EKW, in which it appears that the Commission had assured Austria that the tax in issue was compatible 39 with Community law.

94As regards the second criterion — the existence of a risk of serious economic difficulties for the Member State concerned — the Italian Government asserts that EUR 15 billion would be at stake, and that the need to reimburse such a sum would represent a considerable burden on the State.

37 — See, for example, Case 247/87 Star Fruit v Commission [1989] ECR 291, paragraph 11.

38 — Case C-163/90 [1992] ECR I-4625, paragraph 32.

39 — Case C-437/97 [2000] ECR I-1157, paragraphs 56 and 58.

95I would tend to agree that, if correct, such a figure— which I calculate to amount to some 1.5% of Italy's gross domestic product in 2004 — might well meet the criterion in question.

96However, it appeared at the hearing that Italy had arrived at the figure merely by assuming that each of its 2 million registered taxable persons would be entitled to deduct EUR 1 500 of input VAT each year in respect of the purchase and use of a vehicle, and would be able to claim retroactive deduction over a period of five years.

97The Commission cast doubt on the reliability of such a calculation. I share that doubt. The figure of 2 million taxable persons can presumably be verified easily enough, but Italy has not put forward the slightest evidence to justify its calculation of the average amount of input tax concerned. Many taxable persons will use no vehicle for business purposes. Many others will use several. The proportion of business use is likely to vary widely. The amount which can actually be claimed must take account of the provisions of Articles 5(6) and 17(5) of the 0 Sixth Directive. 4 Moreover, it became clear at the hearing that the five-year period over

40 — See point 82 above.

which deductions could be claimed was a theoretical maximum, for taxable persons who had exercised the greatest possible diligence in lodging claims. The real period may be significantly shorter in many, if not most, cases.

98I do not consider that the Court can decide that the criterion of serious economic difficulties is met on the basis of figures which are, at best, unsubstantiated and, at worst, arbitrary and hypothetical.

99Consequently, I find no grounds for a limitation of the temporal effect of the judgment in the present case.

100That being so, I shall not address the further questions of the date from which such a limitation should apply or the scope of any exceptions to it, which were also raised briefly at the hearing. However, if the Court were to consider that a limitation is appropriate, I suggest that it should not decide those two further issues until after judgment has been delivered in two cases currently before the Grand Chamber, Case C-475/03 Banca Popolare di Cremona and Case C-292/04 Meilicke, in which those issues have been extensively debated.

Conclusion

Conclusion

101In the light of all the above considerations, I am of the opinion that the Court should give the following answers to the questions referred for a preliminary ruling by the Commissione Tributaria di Primo Grado di Trento:

(1) The first sentence of Article 17(7) of Sixth Council Directive 77/388/EEC does not authorise a Member State to exclude goods from the system of deducting value added tax without first consulting the committee provided for in Article 29 of the directive. The Member State consulting the committee must provide, for each proposed legislative act, sufficient information as to the specific content of the exclusion for the other Member States and the Commission to be able to form a view as to whether it meets the substantive criteria laid down in Article 17(7).

(2) Article 17(7) of the Sixth Directive authorises only temporary measures responding to short-term economic circumstances. A measure maintained in force for a period exceeding the duration of such circumstances, without substantial modification such as to respond to a changed economic situation, cannot be authorised under that provision.

(3) If a national measure excluding certain goods from the deduction system has not been validly adopted in accordance with Article 17(7), a taxable person affected by the exclusion may recalculate his VAT liability in accordance with Article 17(2) of the Sixth Directive, entailing an immediate right to deduction, limited however to the extent to which the goods in question were used by the taxable person for the purposes of making taxable output supplies. Any necessary calculations must be established in accordance with the conditions laid down by national law, which have to observe the principles of equivalence and effectiveness.