C-278/83 Commission v Italy

COMMISSION v ITALY

JUDGMENT OF THE COURT 11 July 1985 *

In Case 278/83

Commission of the European Communities, represented by Guido Berardis, a member of its Legal Department, acting as Agent, with an address for service in Luxembourg at the office of Georges Kremlis, also a member of its Legal Department, Jean Monnet Building, Kirchberg,

applicant,

supported by

the French Republic, represented in the written procedure by François Renouard, Deputy Director of Legal Affairs of the Ministry of Foreign Relations, and in the oral procedure by Philippe Pouzoulet, Secretary of Foreign Affairs in the Legal Affairs Directorate of the Ministry for Foreign Relations, both acting as Agents, with an address for service in Luxembourg at the French Embassy,

intervener,

v

Italian Republic, represented by Arnaldo Squillante, Head of the Department for Contentious Diplomatic Affairs, Treaties and Legislative Matters of the Ministry of Foreign Affairs, assisted by Pie Giorgio Ferri, Avvocato dello Stato, acting as Agent, with an address for service in Luxembourg at the Italian Embassy,

defendant,

APPLICATION for a declaration that, by applying to imported sparkling wines a higher rate of value-added tax than those applied to domestically-produced sparkling wines, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty,

* Language of the Case: Italian THE COURT

composed of: G. Bosco (President of Chamber), acting as President, O. Due and C. Kakouris (Presidents of Chambers), P. Pescatore, T. Koopmans, U. Everling, K. Bahlmann, Y. Galmot and R. Joliet, Judges,

Advocate General : Sir Gordon Slynn Registrar: P. Heim

after hearing the Opinion of the Advocate General delivered at the sitting on 6 March 1985,

gives the following

JUDGMENT

(The account of the facts and issues which is contained in the complete text of the judgment is not reproduced)

Decision

Grounds

1By application lodged at the Court Registry on 19 December 1983 the Commission of the European Communities brought an action before the Court under Article 169 of the EEC Treaty for a declaration that, by applying to sparkling wines imported from other Member States a higher rate of value-added tax than those which it applies to domestically-produced sparkling wines, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty.

2It is apparent from the documents before the Court that Article 16 of Decree No 633 of the President of the Republic of 26 October 1972 (Gazzetta Ufficiale della Repubblica Italiana, Ordinary Supplement No 1 to No 292 of 11 November 1972, p. 2) introducing value-added tax makes general provision for three different rates of value-added tax:

(a) a standard rate;

(b) a reduced rate, to be applied to transactions relating to essential goods and services; and

(c) an increased rate, to be applied to transactions relating to luxury goods and services.

The goods and services to which the reduced rate and the increased rate apply are set out in Tables A and B annexed to the decree. At the material time, the rates were respectively 18%, 10% and 38% (Decree Law No. 495 of 4 August 1982, Gazzetta Ufficiale della Repubblica Italiana No 212 of 4 August 1982, p. 5481).

3According to the Commission's application, the standard rate of 18% is applicable to sparkling wines naturally fermented in their bottles, provided that this process is not required by national legislation, the rate of 10% to sparkling wines not fermented in their bottles and the rate of 38% to the sparkling wines defined in Table B annexed to the decree introducing value-added tax as sparkling wines having an appellation of origin and required by legislation to be naturally fermented in their bottles (amendment made by Decree Law No 46 of 18 March 1976, Gazzetta Ufficiale della Repubblica Italiana No 73 of 18 March 1976, p. 2067, ratified by Law No 249 of 10 May 1976, Gazzetta Ufficiale No 129 of 17 May 1976, p. 3744). It is to be observed that since the action was brought those rules have undergone various amendments but these have not affected the definition of the sparkling wines which are subject to the higher rate of tax, which is still fixed at 38% (Decree Law No 853 of 19 December 1984, p. 10582, ratified by Law No. 17 of 17 February 1985, Gazzetta Ufficiale della Repubblica Italiana No 41 bis of 17 February 1985, p. 1181).

4The Commission considers that all sparkling wines, whether fermented in their bottles (the 'champenoise' method) or in closed vats, are similar or competing products for the purposes of Article 95 inasmuch as they 'have similar characteristics and meet the same needs from the point of view of consumers', as the Court held in its judgment of 27 February 1980 in Case 169/78, v Commission Italian Republic, [1980] ECR 385 (paragraph 5 at p. 400 and references therein). The Commission points out in this regard that all 'sparkling wines' constitute a single class according to Item 13 of Annex II to Council Regulation No 337/79 of

5 February 1979 on the common organization of the market in wine (Official Journal, 1979, L 54, p. 1) and Council Regulation No 358/79 of 5 February 1979 on sparkling wines defined in Item 13 of Annex II to Regulation No 337/79 (Official Journal, L 54, p. 130).

5According to the Commission, the tax system in question operates to the detriment of imported sparkling wines whilst favouring domestically-produced sparkling wines. All Italian sparkling wines fall into the two categories which are the least taxed, that is to say the category of sparkling wines fermented in closed vats (taxed at 10%) or the category of sparkling wines naturally fermented in their bottles (taxed at 18%), this process not being imposed, however, by any legislative requirement since there is no requirement in Italy for wine to be fermented in bottles. However, an appreciable proportion of imported sparkling wines falls within the highest tax category (38%) since only foreign legislation requires sparkling wine to be fermented in bottles before a particular appellation of origin may be used, French champagne being the most typical example. The Commission considers that this is therefore a flagrant case of discrimination, contrary to the first paragraph of Article 95 of the Treaty.

6The Commission's conclusions are supported by the French Republic, the intervener in this case. The French Government does not in principle challenge the freedom of Member States to establish differential tax systems for certain products based on objective criteria; it also considers that the Italian Government is entitled to adopt, for reasons of distributive justice, fiscal measures designed to impose heavier taxation on goods that it regards as luxury goods, but only in so far as such measures are consistent with Article 95. In the present case the French Government considers that the Italian system of taxation discriminates against imported sparkling wines required to be fermented in their bottles by the legislation of the country in which they are produced and mainly against French champagne, inasmuch as it discourages the purchase of those wines, which are relatively expensive to produce.

7In its defence the Italian Government contends that in its judgment of 15 march 1983 in Case 319/81, (Commission v Italian Republic, [1983] ECR 601 — taxation of spirits) the Court acknowledged that in its decisions it had consistently recognized the freedom of Member States to establish differential tax systems for certain products based on objective criteria. In the same judgment the Court recognized the right of Member States to provide for a higher rate of tax on luxury goods. In the present case, the Italian taxation legislation has defined a product — for the purpose of subjecting it to the rate of tax provided for in the case of luxury goods — which is known and used as a prestigious product and class symbol by a privileged class of consumers owing in particular to its high price. Since this is an objective criterion, the Italian legislature cannot be reproached for having thus created tax discrimination.

8The Commission challenges the Italian Government's point of view on the determination of luxury goods. It draws attention to the fact that in its judgment of 15 March 1983 in Case 319/81, on which the Italian Government relies, the Court refused to recognize a designation of origin or provenance as a valid criterion for classifying a product as a luxury product. It also draws attention to the danger in using the prices of products as an indication that they might be classified as luxury products since price differences may arise from factors such as the raw materials used, the manufacturing processes and transport» as is precisely the case with champagne imported into Italy. In no event may the classification of a product as a luxury product be regarded as an objective criterion of progressive taxation to the detriment of the requirement of tax equality laid down in Article 95 of the Treaty as regards imported products.

9The Commission's application calls for a preliminary observation. It seeks a declaration that the Italian Republic has failed to fulfil its obligations under Article 95 of the Treaty 'by applying to sparkling wines imported from other Member States a rate of value-added tax higher than the rates which it applies to domestically-produced sparkling wines'. It is apparent from the documents before the Court that the Commission is in fact arguing only about the difference in taxation between, on the one hand, sparkling wines fermented in their bottles where this method is not required in the country of origin (taxed at 18%) and sparkling wines fermented in vats (taxed at 10%) and, on the other hand, sparkling wines having an appellation of origin and required by legislation to be fermented naturally in their bottles (taxed at 38%). However, the Commission has not challenged the tax differential between sparkling wines taxed respectively at 18 and 10%.

10Once the case is defined in those terms, it becomes obvious that the definition given by Italian legislation of the category of sparkling wines subject to the highest rate of taxation is conceived so as to apply only to imported products and is intended to protect the corresponding domestic products by applying appreciably lower rates of tax to them. It therefore constitutes a manifest breach of the rule laid down in Article 95 prohibiting tax discrimination.

11In those circumstances, the question whether a particular type of sparkling wine constitutes a 'luxury product' is irrelevant in view of the fact that Italian legislation does not treat the comparable domestic products as such. It does not therefore appear necessary to consider the parties' arguments about the criteria for defining 'luxury products' or the question raised by the Commission regarding the effect of that concept on intra-Community trade.

12It must therefore be concluded that, by applying to sparkling wines having an appellation of origin and required by national legislation to be naturally fermented in their bottles a rate of value-added tax higher than the rates which it applies to comparable domestically-produced sparkling wines, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty.

Costs

13Under Article 69 (2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs. Since the Italian Republic has failed in its submissions it must be ordered to pay the costs.

Operative part

On those grounds,

THE COURT

hereby:

(1) Declares that, by applying to sparkling wines having an appellation of origin and required by national legislation to be naturally fermented in their bottles a higher rate of value-added tax higher than the rates which it applies to comparable domestically-produced sparkling wines, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty;

(2) Orders the Italian Republic to pay the costs, including those of the intervener.

Bosco Due Kakouris Pescatore

Koopmans Everling Bahlmann Galmot Joliet

Delivered in open court in Luxembourg on 11 July 1985.

G. Bosco P. Heim

President of Chamber Registrar Acting as President

OPINION OF ADVOCATE GENERAL

SIR GORDON SLYNN

delivered on 6 March 1985

My Lords,

In the present proceedings the Commission seeks a declaration that by applying to imported sparkling wines a higher rate of value added tax than that applied to Italian sparkling wines, Italy is in breach of Article 95 of the EEC Treaty.

After Decree-Law No. 495 of 4 August 1982 (GU 212 of 4.8.1982) came into force, the tax structure was as follows :

the rate of 10% applied to sparkling wines not bearing a label to the effect that they had been fermented naturally in their bottles;

wines which had been naturally fermented in their bottles were taxed at 18% where this procedure was not required by the legislation of the producing country;

wines which had an appellation of origin and which had undergone natural fermentation in their bottles were taxed at 38%, when this procedure was required by the legislation of the producing State.

On 21 September 1982 the Commission sent a notice to the Italian Government in accordance with Article 169, claiming that the legislation as it existed at that time was contrary to Article 95. That letter requested the Italian Government to submit its observations within two months. By telex dated 17 December 1982, the latter asked the Commission to extend the deadline by two months but it never replied on the substance of the Commission's letter. Accordingly, on 22 September 1983 the Commission forwarded a reasoned opinion requiring the Italian Government to bring the alleged infringement to an end within one month. Since the Italian Government did not comply with this reasoned opinion, the Commission lodged its application with the Court on 14 December 1983.

Subsequent to that date the position was changed by Decree-Law No. 232 of 15 June 1984 (GU 166 of 18.6.1984), which the Italian Government annexed to its rejoinder. Article 2 (2) of that instrument recast the tax structure so as to remove or substantially remove such discrimination as might exist. However, when that Decree-Law was converted into a Law, Article 2 (2) was struck out (Law No. 408 of 28 July 1984, GU 212 of 2.8.1984). As I understand it, the three-tier structure which I have described was thereby reintroduced. What is more, it would seem that the most recent relevant legislation, namely Decree-Law No. 853 of 19 December 1984 (GU 347 of 19.12.1984), has not-removed the basic discrimination which is alleged to exist.

The lowest rate of tax applies to wines fermented in closed vats, such as Asti Spumante which accounts for some 50% of Italian production of sparkling wines. The middle rate of tax applies to all those Italian sparkling wines which are not in the lowest category. Since Italian legislation does not require any sparkling wine to be fermented in bottles, the highest rate of tax can never apply to any domestically produced wine. By contrast champagne made in the Champagne region of France, which is required by law to be fermented in bottle, falls into the highest category. At the hearing counsel for the Italian Government was not able to say whether any other sparkling wines fall into the highest category, though he thought that they probably did not.

The argument in this case has principally centred on the allegedly discriminatory effect of the highest tax rate. It has not been shown or really contended that there is any discrimination arising from the use of the intermediate tax rate. In my view, despite the wide terms of the declaration sought by the Commission, it is neither necessary, desirable nor indeed possible to consider whether it is justifiable to introduce a higher rate for sparkling wines produced by natural fermentation in their bottles (where that is not required by legislation) than for other sparkling wines not so produced. I consider only the alleged discriminatory effect of the highest tax rate.

The Italian Government defends this higher tax on the basis that luxury goods can be taxed at higher rates since they are consumed by those who can afford to pay for them, who must be taken to be able to pay, and who should on social grounds pay, higher taxes. Moreover, since the consumption of luxury goods is in limited quantities by those who can afford to pay, it is unlikely to be affected by increases in taxation. This higher taxation is permissible not only under Italian law but under Community law as the Court recognised in Case 319/81 Commission v. Italy (1983) ECR 601. Such a tax would only violate Article 95 of the EEC Treaty if the reason for adopting it was to distinguish goods by their place of origin rather than on objective grounds. Wines with an appellation of origin which are fermented in bottles such as French champagne are not just bought for their usefulness in quenching thirst. They have a particular social prestige, are used as a status symbol and are thereby clearly to be classified as luxury goods. This is borne out by the fact that buyers pay far more for French champagne in Italy than for other sparkling wines. Their price is indeed so high that a higher rate of tax will not affect their competitiveness.

The Commission, on the other hand, supported in the result by the French Government, contends that this is clearly a tax which violates Article 95. It is enough to show, for a product to be ‘similar’ for the purposes of the first paragraph of Article 95, that it has, from the consumer's point of view, comparable features and that it satisfies the same needs. The question is whether it provides an alternative choice. The highest rate of tax covers in this case only imported wines. The Community Regulations define sparkling wine as such and there exists a homogeneous group of such wines which satisfy the same needs. There is no objective difference between champagne and other sparkling wines which can justify this tax differential. To distinguish by the existence of an appellation of origin and of a legislative obligation to make the wine by natural fermentation in bottle is not such a justification, not least since the absence of the requirement of an appellation of origin and of such an obligation in Italy is due to the policy of the Italian legislature.

The French Government stresses that sparkling wines constitute one category of wine and that they are in competition with each other whether or not they are subjected to an appellation of origin or to rules of manufacture. The effect of the highest tax has been to reduce imports of French champagne into Italy from 8.7 million bottles in 1980 to 3.7 million bottles in 1983.

In my opinion the Court has clearly recognised that Member States have the right to tax some consumer goods, ‘particularly those regarded as luxury products’, more heavily (Case 319/81 at paras 14 and 21). That right may exist even if the luxury goods are imported entirely from other Member States (Cases 140/79 Chemial and 46/80 Vinal (1981) ECR 1 and 77).

On the other hand such a right is subject to the overriding requirement that the provisions of Article 95 are fully observed. The fact that goods are highly taxed because of the contributive capacity of the consumer, or that the goods are said to be luxury goods does not in itself provide an answer to an allegation that Article 95 has been breached.

The Italian Government is in my view entitled to say that ‘champagne’ from the French region has a particular reputation and status. It is easy to exaggerate the ‘homogeneity’ of sparkling wines relied on by the Commission and the French Government, not least if the efforts of French producers in national proceedings to protect the use of the word ‘champagne’ are borne in mind.

On the other hand, on the evidence it seems to me impossible to say that there is such a gap between French champagne and all other sparkling wines which are naturally fermented in their bottles, without being required to be so produced by the national legislation of their country of manufacture, that champagne must be set apart in a luxury category not shared by any of such wines as fall into the middle category.

In the first place I am prepared to accept that price may be a relevant factor in deciding whether a product is a luxury product. The Italian Government's evidence was that the prices of French champagne and Italian sparkling wine were respectively LIT 18200 and LIT 8500 net of VAT. On the other hand the evidence of the Commission shows that the price before tax was not so very different. Bottles of French champagne were found in Rome and Milan at LIT 14500 and of Italian champagne at LIT 12300 and LIT 13100 respectively net of VAT. Bottles may have been found at all these figures, but the Commission's evidence makes it impossible to say that there is universally a wide differential such as relied on by the Italian Government between champagne and all other sparkling wines.

Secondly, it seems to me clear that the methods of manufacture adopted for the middle and higher tax categories are or may be the same. The existence of a legislative obligation to adopt a particular method and the existence of an appellation of origin do not seem to me of themselves sufficient to justify a distinction between the two products. Indeed if the products are otherwise similar, such a distinction can rarely be justified if the Member State imposing the tax has not introduced legislation or systems of appellation of origin which are ever applicable to its own products. If those are the main or sole criteria for making the distinction between the middle and higher rates they are almost bound to create protection for the Member State's national products as against the products of other Member States.

As the Court put it in Case 319/81 at para. 17 ‘Such a system has the effect of excluding domestic products in advance from the heaviest taxation since they will never fulfil the conditions in which the higher rate is charged and it is entirely at the discretion of the national legislature, in choosing not to introduce a general system applicable to all spirits, to perpetuate that system indefinitely’. It will only be otherwise where there are genuine differences ‘in conditions of production, quality, price or competition between national products and those imported from other Member States’.

Thirdly, the Court has evidence of technological developments in winemaking which suggest that the quality of wines not fermented in bottles has increased and may be increasing so that it is not possible to distinguish quality abruptly according to the method used. This seems to me to be so a fortiori if the method of manufacture of the middle and higher taxed goods is the same. Moreover there is no necessary link between the existence of an appellation of origin and the use of the Champenoise method, since in Italy wines made by this method do not have an indication of origin.

This evidence goes to support what would probably be regarded by most wine drinkers as commonplace that even if sparkling wines are not a completely homogeneous category, there are some which do not emanate from Champagne which have sufficient qualities and features in common with champagne for them to be regarded as broadly similar, as potential substitutes and therefore as in competition.

The fact that champagne is subject to the same rate of VAT in France as other sparkling wines, even though subject to a small differential in regard to circulation tax (of 32 centimes per litre) also goes to suggest that the product is not regarded as being in a luxury class apart.

If products are made, broadly, by the same process, having the same intrinsic characteristics and being put to the same use, they are in my view to be treated prima facie as in competition. The mere fact that one of such products has a higher prestige value than the others does not ipso facto put it in a class apart, as the Italian Government appears to argue, any more than does the existence of a system of manufacture which is required by legislation rather than one which is voluntary. In cases where a product not produced in a Member State is put in a luxury class by that State for taxation purposes, particular care has to be taken to ensure that it really is different from other products made in the Member State, as otherwise it is too easy for Article 95 to be breached. This care is particularly needed if one of the purposes of creating a common market is ‘to eliminate such entrenchment of habits of consumption by ensuring that all consumers have as far as possible equal access to all Community products’ (Case 319/81 at para. 20).

In my opinion in the present case the Commission has established that the differential in taxation in respect of champagne does afford indirect protection to other products and is a taxation in excess of that imposed on similar domestic products.

I consider accordingly that the Commission is entitled to a declaration that by applying in Decree-Law No. 495 of 4 August 1982 (GU 212 of 4.8.1982) a higher rate of tax to sparkling wines which have been naturally fermented in their bottles, where such wines have an appellation of origin and where the fermentation procedure is required by the legislation of the producing State, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty as far as products imported from other Member States are concerned.

I consider also that the Republic of Italy should pay the Commission's costs.