C-230/87 Naturally Yours Cosmetics

Judgment of the Court of 23 November 1988. - Naturally Yours Cosmetics Limited v Commissioners of Customs and Excise. - Reference for a preliminary ruling: Value Added Tax Tribunal, London - United Kingdom. - Common system of value-added tax - Taxable amount - Supplies of goods and services. - Case 230/87. European Court reports 1988 Page 06365

Summary Parties Grounds Decision on costs Operative part

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Tax provisions - Harmonization of laws - Turnover taxes - Common system of value-added tax - Taxable amount - Supply of goods - Consideration directly linked to the supply, capable of being expressed in monetary terms and constituting a subjective value - Reduction of sale price by way of reward for a service provided by the purchaser

( Council Directive 77/388, Art . 11 A 1 ( a ) )

The taxable basis for a supply of goods within the meaning of Article 11 A 1 ( a ) of the Sixth Directive ( 77/388 ) is made up of everything which is received directly in connection with the supply and represents the consideration for it, the latter being a subjective value which must be capable of being expressed in monetary terms .

That provision must therefore be interpreted as meaning that where a supplier (" the wholesaler ") supplies goods (" the inducement ") to another (" the retailer ") for a monetary consideration ( namely a sum of money ) which is less than that at which he supplies identical goods to the retailer for resale to the public on an undertaking by the retailer to apply the inducement in procuring another person to arrange, or in rewarding another for arranging, a gathering at which further goods of the wholesaler can be sold by the retailer to the public for their mutual benefit, on the understanding that if no such gathering is held the inducment must be returned to the supplier or paid for at its wholesale price, the taxable amount is the sum of the monetary consideration and of the value of the service provided by the retailer which consists in applying the inducement to procure the services of another person or in rewarding that person for those services; the value of that service must be regarded as being equal to the difference between the price actually paid for that product and its normal wholesale price .

In Case 230/87

REFERENCE to the Court under Article 177 of the EEC Treaty by the London value-added tax tribunal for a preliminary ruling in the proceedings pending before that tribunal between

Naturally Yours Cosmetics Ltd

and

Commissioners of Customs and Excise

on the interpretation of Article 11 A 1 ( a ) of Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value-added tax : uniform basis of assessment ( Official Journal 1977, L 145, p . 1 ),

THE COURT

composed of : O . Due, President, T . Koopmans, R . Joliet and T . F . O' Higgins ( Presidents of Chambers ), C . N . Kakouris, F . A . Schockweiler and J . C . Moitinho de Almeida, Judges,

Advocate General : J . L . da Cruz Vilaça

Registrar : H . A . Ruehl, Principal Administrator

after considering the observations presented on behalf of

the appellant in the main proceedings, by David Vaughan QC and Messrs S . J . Berwin & Co ., solicitors,

the United Kingdom, by Susan Hay, acting as Agent, and John Mummery and Robert Jay, Barristers,

the Portuguese Government, by Luís Inês Fernandes, Maria Helena Brito and Arlindo Correia, acting as Agents,

the Commission of the European Communities, by Johannes Foens Buhl, acting as Agent,

having regard to the Report for the Hearing and further to the hearing on 21 June 1988,

after hearing the Opinion of the Advocate General delivered at the sitting on 14 July 1988,

gives the following

Judgment

Grounds

1By order of 13 March 1987, received at the Court on 29 July 1987, the London value-added tax tribunal referred to the Court for a preliminary ruling under Article 177 of the EEC Treaty a question on the interpretation of Article 11 A 1 ( a ) of the Sixth Council Directive of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value-added tax : uniform basis of assessment ( Official Journal 1977, L 45, p . 1, hereinafter referred to as "the Sixth Directive ").

2The question was raised in proceedings brought by Naturally Yours Cosmetics Limited (" NYC ") against the Commissioners of Customs and Excise (" the Commissioners ") concerning a decision of the Commissioners with respect to a value-added tax assessment for 1984 .

3It appears from the order for reference that NYC is a company which carries on business as a wholesaler of cosmetic products for resale by retailers (" beauty consultants ") who approach friends and acquaintances (" hostesses ") for the purpose of organizing private parties at which NYC' s products are offered for sale .

4The beauty consultants purchase the products from NYC at wholesale prices and sell them at the parties at a retail price recommended by the company; the difference between those two prices constitutes the profit to which the beauty consultants are entitled . It is apparent from the documents before the Court that the beauty consultants are exempted from the payment of VAT under Article 24 of the Sixth Directive because their turnover falls short of the threshold fixed by the United Kingdom legislation .

5To reward the hostesses for organizing the parties, the beauty consultant gives them one of the products on sale there (" Natural oasis rejuvenating cream ") as a "dating gift ". When the pot of cream is used for that purpose, NYC supplies it to the beauty consultant for UKL 1.50 instead of its normal wholesale price of UKL 10.14 .

6The Commissioners assessed VAT for 1984 on the basis of the normal wholesale price of UKL 10.14 for each pot of cream, including those intended to be used as gifts; in so doing, they relied upon the relevant United Kingdom legislation, namely Section 10 ³ of the Value-Added Tax Act 1983, which provides that : "If the supply is not for a consideration or is for a consideration not consisting or not wholly consisting of money, the value of the supply shall be taken to be its open market value ". NYC considers that that provision is contrary to Article 11 A 1 ( a ) of the Sixth Directive and that the taxable amount should be the price of UKL 1.50 actually paid by the beauty consultant for the pots of cream to be used as gifts .

7Considering that the dispute raised a question of interpretation of Community law, the value-added tax tribunal stayed the proceedings pending a preliminary ruling by the Court on the following question :

"For the purposes of Article 11 A of the Sixth Council Directive on the harmonization of the laws of the Member States relating to turnover taxes ( Directive 77/388/EEC of 17 May 1987 ), where a supplier (' the wholesaler' ) supplies goods (' the inducement' ) to another (' the retailer' ) for a monetary consideration ( namely a sum of money ) which is less than that at which he supplies identical goods to the retailer for resale to the public on an undertaking by the retailer to apply the inducement in procuring another person to arrange, or in rewarding another for arranging, a gathering at which further goods of the wholesaler can be sold by the retailer to the public for their mutual benefit, is the taxable amount

( a ) only the monetary consideration received by the wholesaler for the inducement, or

( b ) the monetary consideration at which the wholesaler supplies the identical goods to the retailer for resale to the public, or

( c ) such amount as is to be determined in accordance with such criteria which may be determined by the Member State concerned, or

( d ) the monetary consideration together with the value of the undertaking by the retailer to apply the inducement in so procuring or rewarding the other person and, if so, how the value of the undertaking is to be determined, or

( e ) some other, and if so, what other, amount?"

8Reference is made to the Report for the Hearing for a fuller account of the facts of the case, the course of the procedure and the observations submitted to the Court, which are mentioned or referred to hereinafter only in so far as is necessary for the reasoning of the Court .

9Article 11 A 1 of the Sixth Directive provides :

"The taxable amount shall be :

( a ) in respect of supplies of goods and services ... everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;

( b ) ..."

10In order to interpret Article 11 A 1 ( a ) of the Sixth Directive, it is necessary, having regard to the common purpose of the Sixth Council Directive and the Second Council Directive ( 67/228/EEC of 11 April 1967 ) on the harmonization of legislation of Member States concerning turnover taxes - Structure and procedures for application of the common system of value-added tax ( Official Journal, English Special Edition 1967, p . 16, hereinafter referred to as "the Second Directive "), to take account of the decisions of the Court on the latter directive .

11According to the judgment of 5 February 1981 in Case 154/80 Staatssecretaris van Financïen v Cooeperatieve Aardappelenbewaarplaats (( 1981 )) ECR 445, the basis of assessment for a service is everything which makes up the consideration for the service; there must therefore be a direct link between the service provided and the consideration received if the supply of a service is to be taxable under the Second Directive .

12Such a direct link must also exist between the supply of goods and the consideration received within the meaning of Article 11 A 1 ( a ) of the Sixth Directive .

13The question thus arises whether there is a direct link between the goods supplied for a price lower than the normal price and the value of the service which must be provided by the beauty consultant .

14It is apparent from the order for reference that a feature of the NYC sales method is that beauty consultants operate at private parties which they organize through hostesses . That is why, it is said, NYC agrees to sell the pot of cream to be used as a gift at a very low price . Moreover, it became apparent at the hearing that where the beauty consultant, being unable to find a hostess to organize a party, does not provide the envisaged service, the pot of cream must be returned or paid for at the normal wholesale price . If that is the case - a matter to be decided by the national court - then there is a direct link between the supply of the pot of cream at a very low price and the service provided by the beauty consultant .

15The national court further asks whether that service must be regarded as part of the consideration for the supply of the goods even though it does not constitute monetary consideration and, if so, how the value of the service is to be determined in cases such as that of the beauty consultant in the present proceedings .

16From the aforesaid judgment of 5 February 1981 it is clear firstly that the consideration must be capable of being expressed in monetary terms and, secondly, that it is a subjective value, since the basis of assessment is the consideration actually received and not a value estimated according to objective criteria .

17In the present case, the parties to the contract have reduced the wholesale price of the pot of cream by a specific amount in exchange for the supply of a service by the beauty consultant which consists in procuring hostesses to arrange sales parties by offering them the pots of cream as gifts . In those circumstances, it is possible to ascertain the monetary value which the two parties to the contract attributed to that service; that value must be considered to be the difference between the price actually paid and the normal wholesale price .

18It must therefore be stated in reply to the question submitted by the national court that Article 11 A 1 ( a ) of the Sixth Directive must be interpreted as meaning that where a supplier (" the wholesaler ") supplies goods (" the inducement ") to another (" the retailer ") for a monetary consideration ( namely a sum of money ) which is less than that at which he supplies identical goods to the retailer for resale to the public on an undertaking by the retailer to apply the inducement in procuring another person to arrange, or in rewarding another for arranging, a gathering at which further goods of the wholesaler can be sold by the retailer to the public for their mutual benefit, on the understanding that if no such gathering is held the inducement must be returned to the supplier or paid for at its wholesale price, the taxable amount is the sum of the monetary consideration and of the value of the service provided by the retailer which consists in applying the inducement to procure the services of another person or in rewarding that person for those services; the value of that service must be regarded as being equal to the difference between the price actually paid for that product and its normal wholesale price .

Costs

Costs

19The costs incurred by the United Kingdom, the Portuguese Government and the Commission of the European Communities, which have submitted observations to the Court, are not recoverable . As these proceedings are, in so far as the parties to the main proceedings are concerned, in the nature of a step in the action before the national court, the decision on costs is a matter for that court .

Operative part

On those grounds,

THE COURT,

in reply to the question submitted to it by the London value-added tax tribunal, by order of 13 March 1987, hereby rules :

Article 11 A 1 ( a ) of the Sixth Council Directive of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes must be interpreted as meaning that where a supplier (" the wholesaler ") supplies goods (" the inducement ") to another (" the retailer ") for a monetary consideration ( namely a sum of money ) which is less than that at which he supplies identical goods to the retailer for resale to the public on an undertaking by the retailer to apply the inducement in procuring another person to arrange, or in rewarding another for arranging, a gathering at which further goods of the wholesaler can be sold by the retailer to the public for their mutual benefit, on the understanding that if no such gathering is held the inducement must be returned to the supplier or paid for at its wholesale price, the taxable amount is the sum of the monetary consideration and of the value of the service provided by the retailer which consists in applying the inducement in procuring the services of another person or in rewarding that person for those services; the value of that service must be regarded as being equal to the difference between the price actually paid for that product and its normal wholesale price .

O P I N I ON OF MR A D V O C A TE GENERAL CRUZ VILAÇA delivered on 14 July 1988 * Mr President Members of the Court,

1The question submitted to the Court for a preliminary ruling by the London value-added tax tribunal and, more so, the long and detailed order for reference provide a clear indication of the problems involved in the application of Article 11 A 1 (a) of the Sixth VAT Directive 1 in the circumstances to which the main proceedings relate.

2The company Naturally Yours Cosmetics Ltd ('NYC') carries on business as a wholesaler of cosmetic products which are sold through retailers known as 'beauty consultants', who approach friends and acquaintances ('hostesses') to organize parties at which NYC's products are offered for sale to the ladies present.

3The beauty consultants — who, it appears, operate independently — purchase the products from the company for a given price and sell them to the customers at the recommended retail price, the difference between the two prices being the profit to which they are entitled.

* Translated from the Portuguese.

1 — Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value-added tax: uniform basis of assessment—OJ L 145, 13.6.1977, p. 1.

6374

4Thus, the beauty consultants come within the category of 'taxable persons', within the meaning of Article 4 (1) of the Sixth Directive, but are exempt from VAT under Article 24 of that directive since their turnover is lower than the threshold laid down by the United Kingdom legislation.

5At each party, the beauty consultant gives the hostess, as a gift for organizing it, a pot of beauty cream. The pot is purchased by the consultant from NYC for UKL 1.50 instead of its normal selling price of UKL 10.14.

6The Commissioners of Customs and Excise, however, assessed VAT for 1984 on the basis of the latter value, relying for that purpose on Section 10 (3) of the United Kingdom Value-Added Tax Act 1983, according to which 'if the supply is not for a consideration or is for a consideration not consisting or not wholly consisting of money, the value of the supply shall be taken to be its open market value'.

7Considering that provision to be contrary to Article 11 A 1 (a) of the Sixth Directive, upon which it relies as being directly applicable, NYC appealed to the London value-added tax tribunal against the assessment, claiming that the tax was payable only on UKL 1.50, the price paid by the beauty consultant for the pot of cream intended to be used as a gift.

8The London tribunal considered that, in order to resolve the dispute, it was necessary to ask the Court of Justice what basis of assessment should be adopted in a case such as this.

9The essential issue is to determine what, pursuant to Article 11 A 1 (a) of the Sixth Directive, is the 'consideration' received in exchange for the pot of cream supplied by the company to the beauty consultants — is it merely the price actually paid by the consultants or does it include something else, and if so, what does that 'something else' consist of?

10The problem arises because the concept of 'consideration' in Article 11 A 1 (a) is not precisely defined and it is difficult to apply it to circumstances of the kind referred to in the question submitted for a ruling.

2

11The Second VAT Directive refers in Article 8 (a) to the concept of consideration, upon which the Court had occasion to express its views in its judgment of 5 February 1981.3

4

12Since, in a later judgment, the Court made clear that, having regard to the 'same legislative aim' of the two directives, account must be taken, in interpreting the Sixth Directive, of the decisions of the

2 — Second Council Directive (67/228/EEC) of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes — Structure and procedures for application of tlic common system of value-added tax—OJ, English Special Edition 1967, p. 16.

Court on the Second Directive, it is necessary, in order to clarify the concept of 'consideration', to take account of the principles already laid down in that judgment of 5 February 1981.

13From that judgment (paragraphs 8 to 14) the following interpretative criteria can be deduced:

(a) The term to be interpreted ('consideration') appears in a provision of Community law which does not refer to the law of the Member States for determination of its meaning and scope, and therefore its interpretation cannot be left to the discretion of each Member State;

(b) As is stated explicitly under point 13 of Annex A to the Second Directive (of which it forms an integral part by virtue of Article 20), consideration should be understood as meaning 'everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance, etc.) that is to say not only the cash amounts charged but also, for example, the value of the goods received in exchange . .. ' (emphasis added);

(c) As a result of the combined provisions of Article 8 (a) and 2 (a) of Second Directive (which correspond respectively to Articles 11 A 1 (a) and 2 (1) of the 3 —Judgment of 5 February 1981 in Case 154/80 Staatssec-Sixth Directive), as a rule only supplies retam van Financien ν Coöperatieve AarJappclenbewaar-plaati [1981] ECR 445 et seq.

of goods and the provision of services 4 — Judgment of 8 March 1988 in Case 102/86 Apple and Pear Development Council'[1988] ECR 1443, paragraph 10. against payment are subject to tax;

(d) For those conditions to be regarded as fulfilled, there must be a direct link between the goods supplied (or the service provided) and the consideration received;

(e) It is apparent from the use of the terms 'against payment' and 'everything received in return' — and from Article 9 of the Second Directive (Article 12 (3) of the Sixth Directive) concerning the standard rate of tax — that the consideration for the supply of goods (or the provision of services) must be capable of being expressed as an amount of money; it also follows that the consideration is a 'subjective value', since the basis of assessment is the consideration actually received and not a value assessed according to objective criteria.

14How can those principles be applied to the present case?

15Let us start by determining what the consideration comprises.

16Article 11 A 1 (a) is very clear in specifying that the consideration is not limited to transfers of money but comprises 5, 'everything which constitutes the consideration which has been or is to be obtained by the supplier... for such supplies' (supplies of goods or the provision of services) from the purchaser, the customer or a third party. The fact that the scope of that expression is not defined shows, of course, that it was intended that

5 — Emphasis added.

6376 the term should be given the broadest possible meaning. This, moreover,' reflects the objectives of the VAT system: a general system of tax on consumption, which is neutral as regards the structure of the transactions, thereby ensuring that it is applied as comprehensively as possible to transactions at all stages of production and distribution (see the fifth recital in the preamble to the First Directive). 6

17All transactions (supplies of goods, the provision of services and imports of goods) for which payment is made are therefore subject to the tax (Article 2 of the Sixth Directive).

18The legislature's concern to levy VAT on the taxable amount in its entirety (and, moreover, in a uniform manner throughout the Community) is also reflected in the very way in which taxable transactions are defined (Articles 5 and 6), including the fact that certain operations are treated by those articles in the same way as supplies of goods or services for consideration.

19If any form of payment—such as, for example, services provided in exchange for the goods supplied — were to be excluded from the consideration, the door would be left open to lawful tax avoidance, frustrating the objectives of the Sixth Directive and enabling part of the basis of assessment to escape taxation, and possibly creating distortions in the tax treatment of situations which are, from the economic or commercial standpoints, substantially identical.

6 — First Council Directive of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes (67/222/EEC, OJ, English Special Edition 1967, p. 14).

20At first sight, therefore, the provision of services is not excluded from the concept of consideration, otherwise it would not be difficult to avoid the tax.

21It is true that, in explaining the concept of 'consideration', point 13 of Annex A to the Second Directive refers only to 'the value of the goods received in exchange' but does not mention the value of the services provided.

22However, the expression is used merely by way of illustration and should not — for that very reason — be interpreted restrictively or literally.

23Goods are referred to, no doubt, because it is goods that are most frequently involved; but in any event it might perhaps be conceded that the legislature's failure to mention services reflects the practical difficulties involved in taking services into account in certain cases. 7

24It should also be stated that, for the purpose of determining the taxable amount, any advantage which the supplier may obtain from the transaction is immaterial, except an advantage obtained by him in return for his part in the operation, which renders irrelevant the example put forward by NYC of the sale of products at a reduced price to dispose of old stocks.

7 — Il is interesting to note that the Commission itself, in the document quoted by the Portuguese Government— COM(74) 795 final, of 26 July 1974, 'Modifications à la proposition de la sixième directive du Conseil' — expressly mentions, as forming part of the 'consideration' and thus necessarily part of the taxable amount, the value of the services obtained or to be obtained, as well as the goods received in exchange.

25But — the second condition to be fulfilled — there must be a direct link between the service provided and the goods supplied before that service can be regarded as the consideration for the supply.

26Everything depends upon the contract entered into.

27In the present case, it is apparent from the documents before the Court — in particular the order for reference — that there is such a link.

28The pot of rejuvenating cream is supplied for UKL 1.50 to the beauty consultant against her undertaking to use it as a gift to induce a hostess to organize a party to promote the sale of NYC products.

29The pot of cream cannot be used for any other purpose, and in particular it cannot be sold to the public for a price greater than that at which it was supplied to the consultant.

30That price may be regarded as only part of the payment for the pot of cream; if the company supplies it to the consultant for such a low price the reason is that, in return, it also receives from the beauty consultant the service of finding a hostess and arranging for a party to be held.

31It might be said, on the other hand, that the task of finding a hostess to organize a party does not constitute a service provided to NYC but rather a service which the consultant provides in her own interests. If the party is not held, the beauty consultant — who has paid the wholesaler for the products — is left with unsold items or, at least, falls behind schedule with her sales, whilst NYC has. already received the payment from the consultant (the retailer), with the result that it is a matter of indif ference to it whether or not she recovers the sums paid.

32That is not the position.

33NYC has an interest in the holding of the party because, since that method — it would appear — is its sole method of selling, the regular disposal of its products depends upon the holding of numerous parties and, therefore, upon the action taken by the consultants to organize them.

34It is for that reason — and, without doubt, for that reason alone — that NYC agrees to supply the pot of cream intended as a gift for such a low price. If the only interest at stake were that of the beauty consultant, it would be logical for the wholesaler to charge her the normal price for the product, so that she would bear the total cost of the free gift (possibly with a discount) which would have to be recovered from the profit represented by the difference between the wholesale and retail prices.

35As is apparent from the documents before the Court, if the beauty consultant does not provide the agreed service to the wholesaler — that is to say, if she fails to find a housewife to organize the party for her—-the pot of cream has to be returned

6378 or paid for at its normal wholesale price, a fact which provides the required support for the statement that the consideration is not, therefore, merely the UKL 1.50.

36To illustrate its contention that the position which I have just described is not correct, NYC gave the example of the sale of a particular item of goods for a price well below the normal price (possibly merely a token price), where the purchaser gives an undertaking to buy larger quantities of the goods concerned in the future. In NYC's view, that undertaking constitutes — as in the case at issue in these proceedings — merely one element in the overall agreement entered into between the two parties, which, notwithstanding the value which it might actually prove to have for the supplier, should not be included in the consideration for the purpose of determining the basis of assessment of VAT. At the hearing, the Agent for the Portuguese Government referred to that same example, and expressed the view that it was not comparable with the situation in the present proceedings since there was no direct relationship between the reduction in price and the promise to purchase additional quantities later at the normal price.

37It seems to me that no decisive argument can be developed from that example.

38Of the two possibilites, one must prevail: either the two situations compared are, as the Portuguese Government maintained, entirely different because, in the example given by NYC, the taxable operations are carried out under different conditions and at separate times without a sufficient relationship between them; or else there are objective factors which enable them to be regarded as identical, possibly leading to the same result. An example of the latter case might be one where the parties agreed that the purchaser should reimburse the supplier for the difference between the normal price and the reduced price in the event of his failing to fulfil his undertaking subsequently to purchase further quantities of the goods. It would then perhaps be possible to perceive a direct link between the price reduction and the undertaking given, and to make a precise 'subjective' evaluation of the service promised, and not provided, in return for the goods supplied. But even in that case it would also be necessary to show that, in view of the size of the reduction, it was not merely a discount or rebate — which are not in principle included in the taxable amount (Article 11 A 3 (b) of the Sixth Directive) — to be rectified or cancelled subsequently.

39In the case at issue in these proceedings, the existence of a specific link between the supply of the pot of cream to the beauty consultant (for less than the normal price) and her undertaking to arrange for a particular party to be organized enables this situation to be distinguished from one where one or more pots of cream are supplied for that price against an undertaking, not given expressly, to organize, on a general basis, parties for the sale of NYC products. In the latter case it would certainly be much more difficult to speak of a specific consideration for the supply of the product at less than the normal price.

40In either case, the portion of the cost of the pots of cream not covered by a cash payment from the retailer will, naturally, be taken into account by the company as one of its general operating expenses and, as the case may be, will be deducted from profits or included in the price calculation for the goods normally sold by it. What is involved therefore are ordinary accounting practices associated with the financial or cash-flow policies adopted by the company, which in no way alter the nature of the transactions in question, regardless of the consideration involved.

41The foregoing exposition also shows (together with the fact that, having regard to the wholesale price, the reduction is substantial: about 86%) that the tax treatment available for discounts and rebates under Article 11 A 3 (b) of the Sixth Directive is simply not applicable. In fact, the idea of a synallagmatic relationship, which is present in this case, is alien to those concepts.

42As regards the service which the hostess, for her part, provides by making her house available and cooperating in organizing the party, it falls outside the scope of the relations between the beauty consultant and the wholesaler, NYC, and does not therefore have to be taken into account in defining the consideration in the sale by NYC to the consultant. The relations between the consultant and the hostess therefore represent another phase in the process of product distribution.

43In that phase, in the event of the consultants' being subject to tax, the free gift of cream to the housewife would itself — regardless of the consideration given for the service provided by the hostess — in principle be taxable. As was pointed out at the hearing by the Agent for the Portuguese Government, Article 5 (6) of the Sixth Directive treats the disposal of a company's goods free of charge as a supply for consideration, and the taxable amount is then determined in accordance with Article 11 A 1 (b).

44The only circumstances in which that would not be the case would be where the supply might be regarded as a 'gift of small value' or a 'sample' which, under Article 5 (6), are not treated as supplies for consideration. In view of the cost of the product in question, however, it seems at least doubtful that that exception could be applicable in the present case.

45The cost price, for the purposes of determining the taxable amount in accordance with Article 11 A 1 (b), would in fact be UKL 10.14, corresponding to the normal wholesale price of the product, the basis of assessment at the preceding stage of the distribution chain.

46It is this fact which, in the final analysis, makes it possible to state that the hostess receives, for organizing the party, an article which is worth UKL 10.14 (or UKL 12.95, the retail sale price of the product) and not merely UKL 1.50, as it would be logical to conclude if the view were taken that that amount was the only consideration received by NYC, being subject as such to tax.

47Before it can be said that the service provided must be regarded as part of the consideration for the goods supplied and must therefore be included in the basis of assessment for VAT, it must—and this is the third condition to be fulfilled — be capable of being evaluated and being expressed in pecuniary terms. As the Court also stated, this 'consideration' must be a

6380 'subjective value' and not a value assessed in accordance with objective criteria.

48In a case like the present one, the possibility that those requirements may be satisfied cannot be ruled out ab initio.

49The parties to the contract (NYC and the beauty consultants) reduced the wholesale price of the goods delivered (the pot of cream) in return for the provision of a service consisting in the organization of a party.

50The fact that the price is reduced only if the party actually takes place, whereupon the pot of cream will be given to the hostess, shows that the parties subjectively assigned to the service provided a value corresponding to that price reduction. Since the portion of the price of the goods which was not paid initially must be paid subsequently if the party is not in fact held, it is clear that, as regards that portion, the goods are paid for either by provision of the service or by a specific sum of money in lieu of that service.

51It is therefore legitimate, in my opinion, to apply the tax to that value, in so far as it also forms part of the consideration in a bilateral contract under which one of the parties delivers goods and the other pays for them partially in money and partially by means of a service which it undertakes to provide.

52Where the transaction is an exchange, the value of what is supplied by one party represents, in the final analysis, the consideration for what is supplied by the other.

53What makes the question somewhat less clear is the fact that the United Kingdom legislation refers to the open market value of the goods delivered or the service provided as the basis of assessment.

54The application of that concept to the present case is misconceived.

55In fact, the aim in view is to determine the value actually assigned by the parties to the consideration, so that tax can be assessed upon it.

56It is true that the calculation of that value involves, in the circumstances of this case, a reference to the wholesale price normally charged for goods of that kind when supplied for sale to the public.

57But the way in which the Commissioners have applied the United Kingdom provision does not, strictly speaking, involve reliance, for the purpose of evaluating the consideration, upon the concept of open market value in the strict sense of that term, as a fictitious concept dissociated from the terms of the transaction in question and from the synallagmatic relationship established between the two parties to the contract.

58In a case such as this one, the relationship between the consideration given by one contracting party and that given by the other is such that it is possible to discover what value they attributed to the service which constituted part of the consideration. That value is calculated, indirectly, by reference to the normal wholesale price of the product; there too, however, it is not a question of an abstract value but rather of a specific price, applied by the same contracting parties in 'normal' transactions, and moreover that price will be charged for the goods in question if the promised service is not provided.

59I should not in any event like it to be concluded from the foregoing reasoning — a conclusion that would be preferred by NYC and, as is evident from its written observations, by the Commission — that it is completely impossible to determine the consideration, for the purposes of Article 11 A 1 (a) of the Sixth Directive, by reference to the concept of normal value or open market value.

60In fact, in certain circumstances, that will be the only effective way of calculating the value of the consideration and levying tax on it, so as to prevent fiscal distortions or avoidance of tax which would necessarily occur if the part of the consideration not represented by the transfer of a given sum of money had to be disregarded.

61As I emphasized at the hearing, it would not be appropriate to accord different tax treatment to two contracts for the sale of a particular product under which payment is made partly in money and partly in the form of goods or services merely because, in one of the contracts, the parties fixed the value of the items supplied or the service provided in exchange and, in the other, did not do so. Only reference to the normal value or open market value can avoid the distortion which would derive from different treatment being accorded to transactions which were virtually identical from the economic point of view.

62That conclusion is not undermined by the fact that Article 11 A 1 (a) of the Sixth Directive — by contrast with the position in the special cases referred to in subparagraph (d) of that provision or Article 11 B 1 (b) (imports) — does not provide in general for reference to the 'open market value'.

63Nor is it undermined by the fact that the reference to that concept contained in the first draft was eliminated from the final version of the directive. 8 If the elimination of that reference has any meaning (and it certainly does), it is that, in the part with which we are concerned, it was intended to replace — as the taxable amount for this type of transaction — the reference to the normal value of the transaction in question (taken as the normal value of the goods or services supplied) by a reference to the consideration, the value of which must be determined in a manner which the directive left unclear.

64In fact — by providing that, in the general case of supplies of goods and the provision of services, the basis of assessment comprises 'everything which constitutes the consideration which has been or is to be obtained by the supplier' — the legislature left open the method of determination or evaluation of that consideration in those

8 — See Commission proposal for a Sixth Council Directive on the harmonization of legislation of Member States concerning turnover taxes — Common system of value-added tax: uniform basis of assessment, submitted to the Council on 29 June 1973 (OJ C 80, 5.10.1973, p: 1; Minutes of Proceedings of the Sitting of the European Parliament of 14 March 1974, OJ C 40, 8.4.1974, p. 34 et seq.

6382 cases where it did not consist of a monetary 9 payment.

65That 'method' must be the one which proves most direct and least distorting and which is most in conformity with the general scheme of the Sixth Directive, as interpreted by the Court (in particular in the judgment of 5 February 1981 in Staatssecretaris van Financiën v Coöperatieve Aardappelenbewaarplaats, cited earlier).

66In certain cases, reliance upon the concept of open market value will, as stated earlier, be the only way of evaluating the consideration and avoiding the unjustified tax distortions or advantages which would otherwise result.

67This appears to have been accepted by the Commission in its observations in Case 10 154/80 and was conceded at the hearing in this case by Counsel for NYC and by the Agent for the Commission.

68But, as I observed in my Opinion in Direct Cosmetics, 11 the normal value will only have to be taken into account where no price has been paid by the purchaser and where it is impossible (or at least,

9 — This conclusion must be compared with that reached by the Court in its judgment of 1 February 1977 in Case 51/76 Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen [1977] ECR 113, at pp. 125 and 126, paragraphs 14 to 18,' concerning the correct interpretation of the term 'capital goods' appearing in the third indent of the first paragraph of Article 17 of the Second Directive. The Court ruled in that case that, since the directive did not contain explicit guidance for defining uniformly and precisely the requirements which had to be satisfied (concerning durability and value, together with the rules applicable for writing off) for an object to be classified as capital goods, the Member States had a certain margin of discretion as regards those requirements.

10 — [1981] ECR 449 and 450.

11 — Opinion in Joined Cases 138 and 139/86 Direct Cosmetics and Laughtons Photographs [1988] ECR 3937, at p. 3949. excessively difficult) to attribute to the consideration, by some other means, its true value for the purposes of the transaction, or, at least, its real market value. At this point it must be stated that the expression used in the United Kingdom legislation and in the English version of the Sixth Directive — 'open market value', which we could assimilate to Ordinary market value' — seems to me to be more felicitous than the expression 'normal value' used in the Romance-language versions of the directive. It is only where there is no market that it is necessary to have recourse to a value other than the real value, or to a deemed value.

69In any event, being a tax on consumption, VAT must be levied as precisely as possible upon the actual amount spent by the consumer and accordingly reference to open market values rather than to real values should be permitted only (otherwise than in cases where that approach is expressly provided for) where it is impossible to follow some other procedure which comes closer to determination of what the Court has called the 'subjective value' of the consideration.

70The Court has confirmed this in the judgment which it gave very recently (on 12 July 1988) in the Direct Cosmetics case to which I referred, in which it held (paragraph 53) that 'the open market value for the purposes of the system established by the derogating measure in question must be understood as meaning the value that is closest to the commercial value on a sale by retail, that is to say the actual price paid by the final consumer'.

71In the present case an approximation of that kind is possible in so far as a value can be accurately (although indirectly) attributed, within the relationship between the parties, to the service provided as consideration for the goods supplied, without its even being necessary — contrary to what might be suggested by the terms of the domestic provision (and particularly by the normal translation thereof into the various Romance languages) pursuant to which the Commissioners took their decision — to refer to the concept of normal value or open market value.

72Since the compatibility of that provision with Community law is not at issue here, it is pointless to make judgments of a general nature concerning the terms in which it is drafted. Accordingly in the reply which I shall suggest shortly I shall confine myself to indicating what seem to me to be the principles to be followed in interpreting Article 11 A 1 (a) of the Sixth Directive, for the purpose of deciding the present case.

73I would merely add that the value of the service incorporated in the consideration must not be determined by reference to what it produces but rather to the subjective value attributed to it by the parties, with the result that the value is not dependent upon the greater or lesser success, or in other words the greater or lesser profit, of the parties held. In the same way, an architect's plan has a price, regardless of whether it is the one selected, as does the opinion given by a university professor, regardless of whether or not the person who consulted him wins his case.

Conclusion

74On the basis of the foregoing considerations, I propose that the Court should rule .that, in circumstances like those described by the London value-added tax tribunal — where a supplier (wholesaler) supplies certain goods (gifts) to another (retailer) for a price considerably lower than that at which it supplies identical goods to the same retailer for resale to the public, against an undertaking given by the retailer to use that gift as a reward to another person for organizing a party during which the wholesaler's products are offered for sale to the public by the retailer, failing which the gift is returned to the supplier or must be paid for at its wholesale price — the taxable amount comprises, pursuant to Article 11 A 1 (a) of the Sixth Directive, the sum of the price paid to the wholesaler and the value of the service provided by the retailer, consisting in the procuring of another person to organize the party, and the value of that service may be regarded as being equal to the difference between the price paid by the retailer for resale to the public and the price which the retailer actually paid.