C-269/86 Mol v Inspecteur der Invoerrechten en Accijnzen

Judgment of the Court (Sixth Chamber) of 5 July 1988. - W. J. R. Mol v Inspecteur der Invoerrechten en Accijnzen. - Reference for a preliminary ruling: Hoge Raad - Netherlands. - VAT on the illegal supply of narcotic drugs within the territory of a Member State. - Case 269/86. European Court reports 1988 Page 03627

Summary Parties Grounds Decision on costs Operative part

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Tax provisions - Harmonization of laws - Turnover tax - Common system of value-added tax - Tax on the supply of goods within the territory of a Member State - Application to unlawful traffic in narcotic drugs - Not permissible - Criminal sanctions for offences - Powers of the Member States - Illegal supplies of amphetamines - Not liable to value-added tax

( Council Directive 77/388, Art . 2 )

The unlawful supply of narcotic drugs on the domestic market of a Member State, which, like the unlawful importation of such drugs into the Community, can give rise only to penalties under the criminal law, is alien to the provisions of the Sixth Directive on the harmonization of the laws of the

Member States relating to turnover taxes . Consequently, Article 2 of the Sixth Directive must be interpreted as meaning that no liability to turnover tax arises upon the unlawful supply of narcotic drugs effected for consideration within the territory of a Member State in so far as the products in question are not confined within economic channels strictly controlled by the competent authorities for use for medical and scientific purposes .

That finding is without prejudice to the powers of Member States to impose appropriate penalties in respect of contraventions of their drugs laws, with all the attendant consequences, in particular of a pecuniary nature .

The unlawful supply of amphetamines is also not liable to value-added tax in so far as the products in question are not confined within economic channels strictly controlled by the competent authorities .

In Case 269/86

REFERENCE to the Court under Article 177 of the EEC Treaty by the Hoge Raad der Nederlanden ( Supreme Court of the Netherlands ) for a preliminary ruling in the proceedings pending before that court between

W . J . R . Mol, Haule,

and

Inspecteur der Invoerrechten en Accijnzen, Leeuwarden,

on the interpretation of Article 2 of the 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 ( Official Journal 1977, L 145, p . 1 ),

THE COURT ( Sixth Chamber )

composed of O . Due, President of the Chamber, T . Koopmans, K . Bahlmann, C . Kakouris and T . F . O' Higgins, Judges,

Advocate General : G . F . Mancini

Registrar : B . Pastor, Administrator

after considering the observations submitted on behalf of

W . J . R . Mol, by Mr De Wal;

the Federal Republic of Germany, by Martin Seidel and Alfred Dittrich, acting as Agents;

the French Republic, by Gilbert Guillaume and Bernard Botte, acting as Agents;

the Kingdom of the Netherlands, by E . F . Jacobs and

G . M . Borchardt, acting as Agents,

the Commission of the European Communities, by Johannes Fons Buhl and Marten Mees, acting as Agents;

having regard to the Report for the Hearing and further to the hearing on 29 October 1987,

after hearing the Opinion of the Advocate General delivered at the sitting on 21 April 1988,

gives the following

Judgment

Grounds

1By a judgment of 29 October 1986, which was received at the Court on 5 November 1986, the Hoge Raad der Nederlanden ( Supreme Court of the Netherlands ) referred to the Court for a preliminary ruling under Article 177 of the EEC Treaty a question on the interpretation of Article 2 of the 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 ( Official Journal 1977, L 145, p . 1 ) (" the Sixth Directive ").

2That question was raised in proceedings between the Netherlands tax authorities and Mr Mol, who had sold amphetamines contrary to the Netherlands law on drugs, relating to the charging of turnover tax on that trade in amphetamines . When the Gerechtshof ( Regional Court of Appeal ) Leeuwarden gave judgment in favour of the tax authorities, Mr Mol made an application for a review on the ground, inter alia, that the transactions in question were not liable to turnover tax because they were illegal .

3Considering that the dispute raised an issue which has not yet been resolved in any decision of the Court, in particular that of 28 February 1984 in Case 294/82 Einberger v Hauptzollamt Freiburg (( 1984 )) ECR 1177, the Hoge Raad referred the following question to the Court for a preliminary ruling :

"Must Article 2 of the Sixth Directive be interpreted as meaning that the supply of amphetamines for consideration within the national territory cannot be subject to value-added tax inasmuch as such supply is forbidden by law?"

4Reference is made to the Report for the Hearing for a fuller account of the facts of the main proceedings and the observations submitted to the Court, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the Court .

5It must first be observed that in fact the national court' s question has two limbs, the first seeking to establish whether Article 2 of the Sixth Directive is to be interpreted as meaning that no liability to turnover tax arises upon the unlawful supply of narcotic drugs effected for consideration within the territory of the country and the second whether, if so, the illegal supply of amphetamines is also not liable to value-added tax .

The first limb of the question

6It should be pointed out that in its judgment in Einberger ( cited above ) the Court interpreted Article 2 ² of the Sixth Directive as meaning that no import turnover tax arises upon the unlawful importation into the Community of drugs not confined within economic channels strictly controlled by the competent authorities for use for medical and scientific purposes .

7Mr Mol and the Commission consider that the solution adopted in that judgment should also be applied as regards transactions within one country . They argue that the Court' s reasoning in that judgment was essentially that narcotic drugs are, by definition, subject to a total prohibition on their importation and marketing in the Community and therefore the supply of narcotic drugs within the territory of the country also falls outside the scope of the Sixth Directive .

8The Governments of the Kingdom of the Netherlands, the French Republic and the Federal Republic of Germany contend that the judgment in Einberger is confined to the unlawful importation of narcotic drugs and therefore does not prejudge any decision on the supply of narcotic drugs within the territory of the country, especially since the Court expressly pointed out in that judgment that there are economic and legal differences between those two transactions . In the case of importation the chargeable event for purposes of value-added tax is essentially the same as the chargeable event for purposes of customs duties, whereas supply within the territory of the country is taxable only where it is effected for consideration by a taxable person acting as such .

9In view of those diverging arguments it must be pointed out that Article 2 of the Sixth Directive defines the scope of value-added tax in the following terms :

"1 . the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

2 . the importation of goods ".

10In this context the preliminary observation should be made that the first limb of the national court' s question relates exclusively to the unlawful supply of narcotic drugs within the territory of the Member State in question . The question whether such a transaction is liable to value-added tax has not yet been the subject of a decision by the Court, which, apart from judgments relating to the customs treatment of smuggled drugs, has had occasion to rule, in the judgment in Einberger, cited above, only on the interpretation of Article 2 ² of the Sixth Directive in relation to the unlawful importation of narcotic drugs into the Community . That judgment did not settle the question of unlawful supply within the territory of the country .

11In the absence of express provisions governing that point in the Sixth Directive, the first question to arise is whether or not the unlawful supply of narcotic drugs within the territory of the country constitutes a taxable transaction or whether the directive must be interpreted as leaving that decision to the Member States .

12It should be observed that, as the Court has already stated with regard to the importation of drugs in its judgment in Einberger, the directive may not be interpreted as leaving that question outside its scope . Such an interpretation would be irreconcilable with the aim pursued by the directive, which is to achieve far-reaching harmonization in that area, particularly with regard to the scope of value-added tax .

13It must next be considered whether, having regard to its context and objectives, the Sixth Directive precludes the levying of value-added tax on narcotic drugs when they are unlawfully supplied within the territory of the country .

14It should be observed that the Sixth Directive is based on Articles 99 and 100 of the EEC Treaty and its objective is the harmonization or approximation of the legislation of the Member States on turnover taxes "in the interest of the common market ". According to the third and fourth recitals in the preamble to the directive, the establishment of a common system of value-added tax should assist the effective liberalization of the movement of persons, goods, services and capital, the integration of national economies, and also the achievement of a common market permitting fair competition and resembling a real internal market .

15Since the harmfulness of narcotic drugs is generally recognized, there is a prohibition in all the Member States on marketing them, with the exception of strictly controlled trade for use for medical and scientific purposes . As the Court has already held with regard to the illegal importation of narcotic drugs into the Community, in its judgment in Einberger, such drugs are, by definition, subject to a total prohibition on importation and marketing in the Community . The Court added that such goods, whose release into the economic and commercial channels of the Community is absolutely precluded and whose illegal importation can give rise only to penalties under the criminal law, are wholly alien to the provisions of the Sixth Directive on the definition of the basis of assessment and, in consequence, to the provisions on the origination of a turnover tax debt .

16That reasoning also applied to the levying of value-added tax on supply within the territory of the country . The unlawful movement of narcotic drugs within the territory of the country, which likewise can give rise only to penalties under the criminal law, is as alien to the aforementioned objectives of the Sixth Directive, and, in consequence, to the origination of a turnover tax debt, as the unlawful importation of narcotic drugs .

17The argument to the contrary put forward by the three governments intervening in this case seems to be motivated by fear that it will be impossible to distinguish in the case-law between illegal dealings in narcotic drugs and other unlawful economic operations and that as a result of the more favourable tax treatment of unlawful trade in general the principle of the fiscal neutrality of the value-added tax system will thus be undermined .

18It must be acknowledged that the principle of fiscal neutrality does in fact preclude, as far as the levying of value-added tax is concerned, a generalized differentiation between lawful and unlawful transactions . However, that is not true in the case of the supply of products, such as narcotic drugs, which have special characteristics inasmuch as, because of their very nature, they are subject to a total prohibition on their being put into circulation in all the Member States, with the exception of strictly controlled economic channels for use for medical and scientific purposes . In a specific situation of that kind where all competition between a lawful economic sector and an unlawful sector is precluded, the fact that no liability to value-added tax arises cannot affect the principle of fiscal neutrality .

19For the same reason it is not possible to accept the three governments' argument based on Article 4 ¹ of the Sixth Directive that any economic activity "whatever the purpose or results of that activity" is subject to value-added tax . Although in defining the term "taxable person" Article 4 ¹ covers economic acitivities in general without drawing a distinction between lawful and unlawful activities, that fact is irrelevant as regards the tax regime applicable to narcotic drugs, since they are already excluded from the scope of value-added tax as defined in Article 2 of the Sixth Directive .

20It must be added that that finding is without prejudice to the powers of Member States to impose appropriate penalties in respect of contraventions of their drugs laws, with all the attendant consequences, in particular of a pecuniary nature .

21The reply to the first limb of the question must therefore be that Article 2 of the Sixth Directive must be interpreted as meaning that no liability to turnover tax arises upon the unlawful supply of narcotic drugs effected for consideration within the territory of the country in so far as the products in question are not confined within economic channels strictly controlled by the competent authorities for use for medical and scientific purposes .

The second limb of the question

22The second limb of the national court' s question seeks to establish whether the rule that no liability to turnover tax arises in the case of the unlawful supply of narcotic drugs within the territory of the country also applies to the unlawful supply of amphetamines .

23In that connection it must be observed that it appears from the observations submitted to the Court in this case that in view of the recognized harmfulness of amphetamines trade in such drugs is generally prohibited in all the Member States .

24That legal situation is reflected at international level by the Convention on Psychotropic Substances, 1971 ( United Nations Treaty Series 1019, No 14956 ), which aims, inter alia, to prevent illicit trafficking in amphetamines; however, that Convention has not been signed by some Member States, including the Netherlands, and therefore does not constitute a basis for the interpretation of Community law .

25It must next be observed that the prohibition under the national law of the Member States on trading in amphetamines is subject to certain exceptions as regards the use of amphetamines which are very limited and strictly controlled by the competent authorities . For instance, the Member States party to the aforementioned Convention make provision for the exceptions contained in the Convention itself . Article 5 ² and Article 4 of the Convention provide that trade in amphetamines is not prohibited for use for medical or scientific purposes; the Convention also authorizes the carrying by international travellers of small quantities of preparations for personal use, the use of psychotropic substances in industry for the manufacture of non-psychotropic substances or products and the use of psychotropic substances for the capture of animals by specifically authorized persons, provided however that those uses are strictly controlled by the competent authorities .

26It follows that, as far as the application of the Sixth Directive is concerned, amphetamines are in the same category as narcotic drugs . They are therefore excluded from the scope of value-added tax as defined in Article 2 of the Sixth Directive except for strictly controlled uses for purposes clearly defined by national law .

27The reply to the second limb of the question must therefore be that the unlawful supply of amphetamines is also not liable to value-added tax in so far as the products in question are not confined within economic channels strictly controlled by the competent authorities .

Costs

Costs

28The costs incurred by the French Republic, the Federal Republic of Germany, the Kingdom of the Netherlands and the Commission of the European Communiites, which have submitted observations to the Court, are not recoverable . Since these proceedings are, in so far as the parties to the main proceedings are concerned, in the nature of a step in the action pending before the national court, the decision on costs is a matter for that court .

Operative part

On those grounds,

THE COURT ( Sixth Chamber ),

in answer to the question referred to it by the Hoge Raad der Nederlanden, by judgment of 29 October 1986, hereby rules :

Signatures

¹ Article 2 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 - must be interpreted as meaning that no liability to turnover tax arises upon the unlawful supply of narcotic drugs effected for consideration within the territory of the country in so far as the products in question are not confined within economic channels strictly controlled by the competent authorities for use for medical and scientific purposes .

² The unlawful supply of amphetamines is also not liable to value-added tax in so far as the products in question are not confined within economic channels strictly controlled by the competent authorities .

OPINION OF MR ADVOCATE GENERAL MANCINI delivered on 21 April 1988 * Mr President, Members of the Court,

1In Cases 269/86 and 289/86 to which this Opinion refers, the Court has once again to determine whether illegal dealing in drugs is subject to value-added tax.

I shall commence by summarizing the facts of the first case. In early 1983 Mr Willem Mol, a Dutch national, was charged and arrested for having sold a number of lots of amphetamines. At the same time, the Dutch tax authorities served on him an assessment to turnover tax for the period 1 September 1982 to 31 March 1983 on the ground that he had dealt in amphetamines as a trader and that that dealing, albeit unlawful, had to be subject to tax. After bringing an unsuccessful action against that assessment before the Gerechtshof (Regional Court of Appeal), Leeuwarden, Mr Mol appealed to the Hoge Raad der Nederlanden (Supreme Court of the Netherlands). There he argued that since such dealing was anti-social and punishable by law it could not give rise to a liability to tax.

The Hoge Raad considered that in order to resolve the dispute it was necessary for Article 2 (1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonization of the laws of the Member

* Translated from the Italian.

States relating to turnover taxes (Official Journal 1977, L 145, p. 1) to be interpreted from a point of view which had not yet been considered by the Court of Justice. Accordingly, pursuant to the third paragraph of Article 117 of the EEC Treaty it suspended the proceedings by judgment of 29 October 1986 and referred the following question to the Court:

'Must Article 2 of the Sixth Directive be interpreted as meaning that the supply of amphetamines for consideration within the national territory cannot be subject to value-added tax inasmuch as such supply is forbidden by law?'

Let us now turn to Case 289/86. The sociocultural association, Happy Family, runs a youth centre in Amsterdam in which a 'house dealer' sells soft drugs to its members, part of the proceeds accruing to the association. House dealers' activities are to some extent institutionalized. Under the guidelines issued by the Dutch public prosecutors' office on the investigation and prosecution of offences against the Opiumwet (Opium Law 1928) a house dealer is defined as a 'dealer in hemp products who, with the trust and protection of those in charge of a youth centre, obtains sole permission to deal in that centre'. In theory, house dealers may be prosecuted; however, since it has established other priorities in controlling drug dealing, the public prosecutors' office does not prosecute them provided that they are not found dealing in public in a blatant manner (Staatscourant 18.7.1980, p. 137).

The tax authorities also served a tax assessment upon Happy Family in respect of the period 13 September 1984 to 31 March 1985. Happy Family appealed against that assessment to the Gerechtshof (Regional Court of Appeal), Amsterdam, on the ground that according to the Court's judgment of 28 February 1984 (Case 294/82 Einberger v Hauptzollamt Freiburg Tinberger II' [1984] ECR 1177) profits on drug trading are not liable to tax; by judgment of 28 October 1986 the national court referred the following questions for a preliminary ruling:

'1. Following the judgment of the Court of Justice of the European Communities of 28 February 1984 in Case 294/82 Einberger v Hauptzollamt Freiburg must Article 2 (1) of the Sixth Council Directive be interpreted as meaning that upon the supply of narcotic drugs within the territory of a Member State no turnover tax arises either?

2 If Question 1 must be answered in the affirmative, does that answer apply to the supply of all kinds of narcotic drugs, including the supply of hemp products?

3 If Question 2 must also be answered in the affirmative, can the fact that a policy of restraint pursued by the competent judicial authorities as regards the prosecution of offences makes it possible in certain circumstances to provide prohibited supplies of hemp products be a ground for taking a different view of

3640 the question whether turnover tax is due upon the supply of such products?'

Clearly the question put by the Hoge Raad corresponds to the first of the questions put by the Gerechtshof. This, together with the identical subject-matter of the two cases, justifies their being considered together. Of course, I shall consider the Gerechtshof's second and third questions separately (in sections 5 and 6 below).

In both proceedings the French, German and Netherlands Governments and the Commission of the European Communities have lodged written observations; in addition, the Netherlands Government and the Commission took part in the hearing. In Case 289/86 Happy Family lodged written observations and took part in the hearing, whereas in Case 269/86 Mr Mol merely took part in the oral proceedings.

2For the sake of a better understanding of the issues it is worthwhile calling the relevant Community legislation to mind. It can be reduced to Articles 2 (1) and 4 (1) of the Sixth Directive. Article 2 (1) provides that 'the supply of goods or services effected for consideration within the territory of the country by a taxable person . . .' is to be subject to value-added tax. Article 4 (1) provides that '"taxable person" shall mean any person who independently carries out in any place any economic activity . . .whatever the purpose or results of that activity'.

As far as illegally imported drugs in particular are concerned, reference should also be made to four judgments of the Court, of which three concern the liability ment of such goods to customs duties (judg of 5 February 1981 in Case 50/80 Horvath v Hauptzollamt Hamburg Jonas [1981] ECR 385, and the judgments of 26 October 1982 in Case 221/85 Wolf v Hauptzollamt Düsseldorf [1982] ECR 3681, and in Case 240/81 Einberger v Hauptzollamt Freiburg 'Einberger I' [1982] ECR 3699) and one whether the unlawful importation of drugs can give rise to liability to turnover tax (judgment of 28 February 1984 in Case 294/82 Einberger II, cited above). All those judgments enshrine the same principle: unless they are confined within controlled channels and are intended for use for medical or scientific purposes, there is an absolute ban on the importation and marketing of drugs in the Community; hence, if drugs are discovered or are undetected by the authorities, they cannot give rise to liability to customs duty or to tax (see the judgment in paraEinberger II, graphs 14, 15 and 16).

3Unlike the cases which the Court has considered hitherto, these cases are concerned, not with the unlawful importation of drugs, but with the supply of drugs for consideration within the territory of a Member State. In essence, what the two Dutch courts are now asking is whether the principle set out above is applicable thereto.

The Member States which have submitted observations suggest that the Court should answer that question in the negative, supporting that view with a series of arguments based either on the provisions and objectives of the Sixth Directive or on the iniquitous or dangerous effects of extending the judgment in Einberger II beyond its original limits. In particular, the first set of arguments refer to (a) Article

4 (1), insofar as it determines that the purpose and the results of an economic activity have no bearing on whether that activity is subject to value-added tax (the Netherlands, France); (b) the objective of value-added tax, which is to impose a comprehensive tax on final consumption within the territory of the country and takes no account of the possible unlawfulness of the transaction whereby the consumer obtains the product (Federal Republic of Germany) and (c) the difference between the event which caused the tax to arise in these two cases (supply within the territory) and in the case (importation) in which the Court held that no liability to tax arose.

According to the second set of arguments, when the judgment in applied Einberger II is to the facts in question it (d) ends up by giving preferential tax treatment to the illegal market over the legal market and, within the context of the illegal market, to dealing in drugs over the 'black economy' or dealing in arms or pornography (Netherlands, Germany); (e) by adversely affecting the harmonization of taxable transactions which is pursued by the directive, falls within legal systems which subject sales of drugs to different rules. It is manifest from the third question put by the Gerechtshof that conduct which is prohibited and strictly repressed in some Member States is expressly tolerated in others (France).

The appellants in the two main proceedings and the Commission express the opposite view. They maintain that the Court's case-law is completely transposable to cases of this type, with the result that the supply of drugs in the territory of a Member State must be held not to be liable to tax.

4It was held in the judgment in Einberger II that illegal imports of drugs were not subject to customs duties and value-added tax on the basis of the bans on importation and marketing to which such substances are subject in all the Member States as a result of the international commitments which they have assumed (Single Convention on Narcotic Drugs, New York, 30 March 1961, and Convention on Psychotropic Substances, Vienna, 21 February 1971, in United Nations Treaty Series, Volumes 520 and 1019, pages 151 and 175). In my view that factor is of great relevance to these two cases. By bringing the two prohibitions together, in fact, the Court seems to consider that drugs fall outside lawful economic channels in the various Member States. The fact that drugs are physically present in the Member States because they are manufactured domestically rather than being imported has no significance; in both cases, to utilize the wording of paragraph 13 of the judgments in Wolf and Einberger I, what is decisive is that they may not be 'integrated into the economy of the Community'.

Having said that, let us turn to the arguments put forward by the Member States which have submitted observations. Their arguments based on the wording or the objectives of the directive seem, in my view, to be generally very weak. For instance, it is obvious that by using the term 'economic activity' or by setting out its intention to tax 'final consumption', the directive refers to goods which are integrated into the economy of the Community and hence excludes from its field of application products which do not satisfy that requirement. Furthermore, it cannot be said that the Community legislature pays no heed to the unlawfulness of the transaction by which the final consumer acquires the goods; Article 5 (1) provides that '"supply of goods" shall mean the transfer of the right to dispose of tangible property as owner', and it is possible to become owner

3642 only as the result of an event or legal act which the law recognizes as causing a person to have dominion over a thing. Finally, although the directive does makes a distinction as regards taxable events between import value-added tax and value-added tax charged within the territory of the country (Article 2 (1) and (2)), it is also certain that the objectives of the two taxes coincide and, as the Commission observed in answering a question put by the Court, 'importation constitutes [simply] the first supply within the country*.

The arguments based on the alleged adverse effects which the judgment in Einberger II would be liable to have were it applied here are equally unacceptable. The first argument was also put forward in the proceedings which resulted in the judgment in the Einberger II case, and I shall respond to it, as I did then, by observing that it can be assessed only from the ethical and political point of view: legally it is of no avail because the wealth acquired by the dealer — that is to say the value of the drugs sold — is merely de facto since it is not the result of a 'transfer' within the meaning of Article 5 ¹, cited above, (for a similar argument see Berliri, Princìpi di diritto tributario, Milan 1972, p. 102). Neither can it be said that if drug dealing is taken outside the scope of value-added tax, it will be put in a privileged position compared with trading in weapons or pornography. Albeit within narrow limits, those goods are obtainable in legal channels; in no event are drugs so obtainable. In fact, it is not possible for drugs to be acquired lawfully by persons as consumers, only as patients (Wattel, 'Belastingsheffing van de onderwereld; het EG-Hof en de drugshandel', in Weekblad voor fiscaal recht, 1987, p. 363).

In conclusion, I do not deny that since the area of drugs is subject to rules of varying strictness in the various systems the judgment in may detract from Einberger II the harmonization of taxable transactions. However, it is a fact that that observation is as valid for imports as it is for supplies within the territory of a country and hence it is directed not so much at the extension of the principle laid down in the Einberger II judgment but rather at the principle itself. Criticism, albeit by implication, of a court judgment is permissible; but until such time as the Court is moved to change its mind it leaves matters as they stand. In other words, for the present it is possible only to observe hoc iure utimur.

5Consequently the Hoge Raad's question and the Gerechtshof's first question should be answered as follows: in so far as sales of drugs within the territory of a Member State take part outside legal Community channels they cause no liability to value-added tax to arise. Having reached that conclusion we must tackle the Gerechtshof's second question. After remarking that the illegal imports with which the Court had to deal in its previous judgments were all of hard drugs (heroin, morphine, cocaine), the Gerechtshof wishes to establish whether the rule that no turnover tax arises also applies to sales of soft drugs and, in particular, of hemp products.

It is clear from the national court's judgment that the proceeds whose liability to value-added tax is under discussion arise as a result of the sale of hashish, that is to say of a substance which, according to the international rules cited in section 3 above (Article 2 (1) of the 1961 Convention and Schedule I thereto), is in all respects a drug. Consequently hashish, too, is subject to the absolute prohibitions on importation and marketing in the various Member States (see, as far as the Netherlands is concerned, Article 3 of the Opiumwet) which led the Court to categorize narcotics as goods incapable of being 'integrated into the economy of the Community'; and it seems to me that this is a sufficient basis for concluding that the answer given to the first question is fully applicable thereto.

6The third question raises more complex problems. The Gerechtshof asks the Court whether if sales of hashish are held not to be liable to value-added tax must a different view of the question be taken where the national judicial authorities forgo prosecuting dealers in certain circumstances.

I have already adverted to the limits within which that policy of restraint is practised in referring to the content of the directives of the Netherlands public prosecutor's office (section 1 above). It should be added that in its written observations and even more at the hearing the Commission painted a picture of sales of hashish in the Netherlands according to which those limits are thin if not even non-existent: thus, far from stopping outside youth centres and in cases of blatant dealing, the authorities' permissiveness even tolerates the appearance on the signs or in the windows of numerous coffee shops in the main Dutch cities of a picture of a leaf of Indian hemp. The Commission infers from that state of affairs that 'albeit distributing an unlawful product, the taxable person carries out transactions which are regarded as lawful'. Consequently they are liable to value-added tax.

Obviously I am in no position to pronounce international authority. In 1983 an on the reliability of the information inspection committee of the International provided by the Commission; however, the Narcotics Control Board examined the conclusions drawn therefrom are, in my practice in question in order to determine view, to be rejected. Let us not forget that whether it was compatible with the obliin the Netherlands the public prosecutor is gations incumbent upon the Netherlands not under an obligation to prosecute under the New York Convention, and it offences which come to his notice; as a took the view that the practice was fully result, the failure to take criminal correct (Twede Kamer der Staten-Generaal proceedings — even if that is not a sporadic 1983-84, 17867, No 7).

occurrence but reflects a definite policy (which is usually justified by the need to concentrate the available resources on Since, in addition, the supply of an illegal curbing more alarming forms of crimi product cannot be regarded as being lawful nality) — does not eradicate or detract from unless Article 5 (1) of the Sixth Directive is the illegality of the conduct tolerated. ignored, the Commission's argument is Moreover, we have not only the fundamentally unfounded. The 'policy of Netherlands Government's word that the restraint' which is the subject of the sale of hashish remains an offence, that is Gerechtshof's question therefore cannot also recognized by the national court and, affect the answer which I gave to the second what is more important, by the competent question.

Conclusion

7In the light of the above considerations I propose that the Court should answer the questions put by the Hoge Raad der Nederlanden by judgment of 29 October 1986 in the proceedings between Willem Mol and Inspecteur der Invoerrechten en Accijnzen, Leeuwarden, and by the Gerechtshof, Amsterdam, by judgment of 28 October 1986 in the proceedings between Vereniging Happy Family and Inspecteur der Omzetbelasting, Amsterdam, in the following terms:

'Article 2 (1) of Council Directive 77/388 of 17 May 1977 must be interpreted as meaning that supplies effected for consideration within the territory of a Member State of drugs outside economic channels strictly controlled by the competent authorities for use for medical and scientific purposes are not liable to value-added tax.'

That conclusion is unaffected by the fact that the drugs sold are hemp products and that, in pursuing a policy of restraint, the relevant judicial authorities allow prohibited sales of such products to take place in certain circumstances without their giving rise to criminal consequences.