C-381/01 Commission v Italy

JUDGMENT OF THE COURT (Second Chamber)

15 July 2004

In Case C-381/01,

Commission of the European Communities, represented Agent, with an address for service in Luxembourg,

v

Italian Republic, represented by I. M. Braguglia, acting Bellis, avvocato dello Stato, with an address for service in

supported by *

by E. Traversa, acting as

applicant,

as Agent, and by G. de Luxembourg,

defendant Republic of Finland, represented by T. Pynnä, acting as Agent, with an address for service in Luxembourg,

* Language of the case: Italian.

and by

Kingdom of Sweden, represented by A. Kruse, acting as Agent,

interveners,

APPLICATION for a declaration that, by failing to levy value added tax on aid paid under Council Regulation (EC) No 603/95 of 21 February 1995 on the common organisation of the market in dried fodder (OJ 1995 L 63, p. 1), the Italian Republic has failed to fulfil its obligations under Article 11 of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1),

THE COURT (Second Chamber),

composed of: C.W.A. Timmermans, President of the Chamber, C. Gulmann (Rapporteur), J.-P. Puissochet, J.N. Cunha Rodrigues and N. Colneric, Judges,

Advocate General: L.A. Geelhoed, Registrar: L. Hewlett, Principal Administrator, having regard to the Report for the Hearing,

after hearing oral argument from the parties at the hearing on 16 October 2003, at which the Commission was represented by E. Traversa, K. Simonsson, I. Koskinen and K. Gross, acting as Agents, the Italian Republic by G. de Bellis, the Republic of Finland by T. Pynnä and the Kingdom of Sweden by A. Kruse,

having heard the Opinion of the Advocate General at the hearing on 27 November 2003,

gives the following

Judgment

Legal context and the dispute

1By application lodged at the Court Registry on 4 October 2001, the Commission of the European Communities brought an action under Article 226 EC for a declaration that, by failing to levy value added tax ('VAT') on aid paid under Council Regulation (EC) No 603/95 of 21 February 1995 on the common organisation of the market in dried fodder (OJ1995 L 63, p. 1), the Italian Republic has failed to fulfil its obligations under Article 11 of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, 'the Sixth Directive').

Legal background

Community legislation on VAT

2Article 2(1) of the Sixth Directive subjects to VAT 'the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such'.

3Article 11(A)(1)(a) 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.'

Community legislation on aid for dried fodder

4Article 3 of Regulation No 603/95 provides that aid is granted at EUR 68.83 per tonne for artificially heat-dried fodder and at EUR 38.64 per tonne for sun-dried fodder.

5Article 4, as amended by Council Regulation (EC) No 1347/95 of 9 June 1995 (OJ 1995 L 131, p. 1), establishes, for each marketing year, a maximum guaranteed quantity of products in respect of which aid may be granted. It also divides those quantities between the Member States.

6Article 5 provides that:

'Where the amount of dried fodder for which aid is claimed ... in any marketing year exceeds the [maximum guaranteed quantity] referred to in Article 4 ..., the aid to be paid in that year shall be calculated as follows:

— for the first 5 % by which the [maximum guaranteed quantity] is exceeded, the aid shall be reduced in all Member States by an amount which is proportionate to that excess,

— for any excess beyond 5 % additional reductions shall be made in any Member State in which production exceeds the [national guaranteed quantity] increased by 5 % proportionate to this excess.

7Article 6(2) makes any advance payment subject to the condition that the dried fodder has left the processing undertaking.

8Article 8 provides:

'The aid provided for in Article 3 shall be granted, on application from the party concerned, in respect of dried fodder having left processing undertakings and meeting the following conditions:

(a) the maximum moisture content must fall between 11 and 14% and may vary with the form of presentation of the product;

(b) the minimum crude protein content in dry matter must not be less than:

— 15% in the case of the products listed in Article 1(a) and the second indent of Article 1(b),

— 45% in the case of the products listed in the first indent of Article 1(b); (c) the dried fodder must be of sound, genuine and merchantable quality.

Further conditions, in particular regarding fibre, carotene content, may be stipulated

9Article 9(c) provides:

'The aid provided for in Article 3 shall be granted only to [processing] undertakings ... which:

(c) fall into at least one of the following categories:

— undertakings which have concluded contracts with producers of fodder for drying,

— undertakings which have processed their own crops or, in the case of groups, those of their members,

— undertakings which have obtained their supplies from legal or natural persons providing certain guarantees to [be] determined, who have concluded contracts with producers of fodder for drying; these legal or natural persons shall be buyers approved by the competent authorities of the Member States in which the fodder is harvested ... .'

10Article 11(2) states:

'Where contracts as referred to in the first indent of Article 9(c) are special-order contracts for the processing of fodder supplied by the producers, they shall specify at least the area whose crop is to be delivered and include a clause laying down an obligation on processing undertakings to pay the producers the aid specified in Article 3 which they receive for the quantities processed under the contracts.'

The administrative procedure and the action

11On 4 November 1998, having found that the Italian Republic was not levying VAT on aid paid under Regulation No 603/95 and taking the view that this was contrary to Article 11(A)(1)(a) of the Sixth Directive, the Commission sent the Italian Republic, in accordance with the procedure laid down in Article 169 of the EC Treaty (now Article 226 EC), a letter of formal notice calling on it to submit its observations within two months.

12Since it did not receive a reply to that letter, the Commission, on 30 July 1999, sent a reasoned opinion to the Italian Republic and required it to take the measures necessary to comply with the opinion within two months.

13The Italian Government replied by letter of 28 September 1999. It challenged the basis of the Commission's complaints, stating inter alia that Community subsidies to undertakings processing fodder are not directly linked to the price of drying operations and therefore are not to be included in the taxable amount for VAT, as defined in Article 11(A)(1)(a) of the Sixth Directive.

14Against that background, the Commission decided to bring this action.

15By order of the President of the Court of Justice of 29 April 2003, the Republic of Finland and the Kingdom of Sweden were granted leave to intervene in support of the form of order sought by the defendant, pursuant to Article 93(7) of the Rules of Procedure, that is to say solely by way of observations during the oral procedure.

Substance

Arguments of the parties

16The Commission submits that the supplies involved in two of the three possible ways in which undertakings processing fodder may carry out their activities are subject to VAT, namely:

— the purchase of green fodder from producers followed by the onward sale of the processed product to third parties;

— the conclusion with producers of special-order contracts for green fodder without transfer of ownership in the fodder and the subsequent return of the processed product to the producers.

17In the case of processing undertakings which purchase fodder from producers in order subsequently to sell it on to third parties, contracts for the purchase and onward sale of goods are concluded; they are transactions which must clearly be regarded as supplies of goods for the purposes of the Sixth Directive and are consequently taxable.

18In the case of special-order contracts, the fact that the processing undertaking returns the dried fodder to the green fodder producer means that the supply must be regarded as the supply of a service, namely the drying of fodder. That supply of a service is thus, as such, taxable on the basis of the Sixth Directive.

19Under Article 11(A)(1)(a) of the Sixth Directive, taxable supplies should give rise to a charge to VAT on aid paid under Regulation No 603/95.

20The Commission points out that under the terms of Article 9 of Regulation No 603/95, '[t]he aid provided for in Article 3 shall be granted only to undertakings processing the products ...'. Those undertakings are thus the beneficiaries of the subsidies in the legal sense of the term and the Community legislature intended to denote them in referring, in Article 11(A)(1)(a) of the Sixth Directive, to 'the consideration which ... is to be obtained by the supplier'. Regulation No 603/95 does not mention any other beneficiary, in the legal sense of the term, of the aid for marketing dried fodder.

21The Commission acknowledges that a subsidy granted to a particular category of undertakings may have beneficial economic effects for operators situated, in the production cycle, both upstream from the subsidised undertakings (in this case the producers of green fodder) and downstream from them (in this case livestock farmers). In the case of special-order contracts, the Community legislature itself requires, in Article 11(2) of Regulation No 603/95, that the processing undertaking pay to the producers the aid received from the intervention agency.

22However, neither the possibility that a subsidy will benefit other operators nor the obligation to pay all or part of a subsidy to other operators in any way alters the legal aspects of the problem. The beneficiary of the aid, in the legal sense of the term, namely the processing undertaking, must be distinguished from the indirect beneficiary of the subsidy in the economic sense of the term.

23The Commission argues that the Community legislature, in employing in Article 11 (A)(1)(a) of the Sixth Directive the concept of 'subsidies directly linked to the price', intended to include in the taxable amount for VAT all aid having a direct impact on the amount of consideration obtained by the supplier. Those subsidies must have a direct link, or even a causal link, with the supply of precisely quantified or quantifiable goods or services: aid is granted to the extent to which those goods or services are actually sold on the market. That is the case here.

24The Italian Government contends, as regards the special-order contracts, that the aid does not benefit the processing undertaking but the producer, in accordance with Article 11(2) of Regulation No 603/95, by virtue of which special-order contracts must include a clause laying down an obligation on processing undertakings to pay the producers the aid specified in Article 3 of that regulation which they receive. In those circumstances, the aid paid is not subject to VAT.

25As regards the case in which the processing undertaking buys green fodder from the producer in order subsequently to sell it on, after processing, to third parties, the aid will be subject to VAT only if it can be proved that the purchasers of the dried fodder profit from the aid. There is no such proof.

26During the oral procedure, the Finnish and Swedish Governments supported the form of order sought by the Italian Government.

Findings of the Court

27By providing that the taxable amount for VAT encompasses, in the cases specified by it, subsidies paid to taxable persons, Article 11(A)(1)(a) of the Sixth Directive is intended to subject the full value of goods or services to VAT and hence to prevent payment of a subsidy entailing a lower return from the tax.

28In accordance with its terms, that provision applies where the subsidy is directly linked to the price of the transaction in question.

29For that to be the case, the subsidy must first be paid specifically to the subsidised operator to enable it to supply particular goods or services. Only in that case can the subsidy be regarded as consideration for the supply of goods or services and therefore be taxable. It must be noted, in particular, that the beneficiary is recognised as having a right to receive the subsidy, since a taxable supply has been made by it (Case C-184/00 Office des produits wallons [2001] ECR I-9115, paragraphs 12 and 13).

30It is also necessary to verify that the purchasers of the goods or services benefit from the subsidy granted to the beneficiary. The price payable by the purchaser must be fixed in such a way that it diminishes in proportion to the subsidy granted to the seller or supplier of the goods or services, which therefore constitutes an element in determining the price demanded by the latter. It must also be ascertained whether, objectively, the fact that a subsidy is paid to the seller or supplier allows the latter to sell the goods or supply the services at a price lower than he would have to demand in the absence of subsidy (Office des produits wallons, paragraph 14).

31The consideration represented by the subsidy must, at the very least, be identifiable. It is not necessary for the subsidy to correspond exactly to the diminution in the price of the goods or services supplied. It is sufficient if the relationship between the diminution in price and the subsidy, which may be at a flat rate, is significant (Office des produits wallons, paragraph 17).

32In conclusion/subsidies directly linked to the price' for the purposes of Article 11(A) (1)(a) of the Sixth Directive include only subsidies which constitute the whole or part of the consideration for a supply of goods or services and which are paid by a third party to the seller or supplier (Office des produits wallons, paragraph 18).

33It must be held that in the present case the conditions for the aid at issue to be subject to VAT are not met in respect of either of the two categories of transaction referred to by the Commission, namely (i) the sale by a processing undertaking, after drying, of fodder purchased from producers of green fodder and (ii) the special-order contracts concluded by a processing undertaking with a producer of green fodder.

Sale, after drying, of fodder purchased from producers

34It is the Commission's contention that the sale of dried fodder by a processing undertaking which has purchased the raw material from producers of green fodder constitutes a supply of goods within the meaning of the Sixth Directive.

35The aid is paid to the processing undertaking, which may freely use it.

36However, it is not directly linked to the price of the taxable transaction for the purposes of Article 11(A)(1)(a) of the Sixth Directive.

37It is not paid specifically to enable the processing undertaking to supply dried fodder to a purchaser.

38In this instance the parties agree that there is no shortage of dried fodder on the world market. Nor is it in dispute that the objective of the aid scheme is, first, to encourage production within the Community, despite the fact that production costs are higher there than on the world market, in order to ensure an internal source of supply and, second, to produce high-quality fodder. In that regard, the 11th recital in the preamble to Regulation No 603/95 mentions '[encouraging] a regular supply of green fodder to processors and [enabling] producers to benefit from the aid scheme' and the 10th recital states that criteria relative to the minimum quality of dried fodder entitled to aid should be determined — criteria which are set out in Article 8 of Regulation No 603/95.

39Against that background, it does not seem that the aid scheme is a scheme for promoting consumption. It is not intended to encourage third parties to buy dried fodder on account of prices which, because of the aid, are lower than the world market price, a situation in which a taxable amount for VAT restricted to the price paid would not correspond to the full value of the goods supplied. It is intended to enable those third parties to obtain supplies of fodder within the Community at a price which is comparable to the world market price and at which they could in any event obtain supplies outside the Community if, in the absence of aid, the supply of fodder within the Community were non-existent or proved insufficient. The VAT charged on that price therefore reflects the full value of the product on the market.

Operative part

40On those grounds alone and without any need to consider whether the other conditions for including the aid in the taxable amount are met, it must be held that the Commission's complaint concerning the sale, after drying, of fodder purchased from producers is unfounded.

Special-order contracts

41As the Commission points out, the purpose of a special-order contract is the supply of a drying service, which is carried out by the processing undertaking on behalf of the producer of green fodder.

42However, Article 11(A)(1)(a) of the Sixth Directive requires that the subsidy, in order to be taxable, be paid to the supplier of the goods or services, so that he may freely use it.

43In the case of special-order contracts, the aid which the processing undertaking receives is not paid for its benefit.

44Admittedly, Article 9 of Regulation No 603/95 provides that 'the aid ... shall be granted only to undertakings processing the products ...'.

45However, the 15th recital in the preamble to Regulation No 603/95 states, in relation to special-order contracts, that the aid should be passed back to the producer and Article 11(2) of the regulation imposes an obligation on processing undertakings to pay the producers the aid which they receive for the quantities processed under the contracts entered into.

46Thus, the processing undertaking may not use the aid freely. It merely functions as an intermediary between the body which distributes the aid and the fodder producer. In that regard, the Commission's test, based on the idea of the 'legal beneficiary' of a subsidy, regardless of the economic benefit of the latter, cannot be accepted.

47In those circumstances, the aid cannot be regarded as consideration, for the processing undertaking, for its supply of a service and it does not enable the undertaking to supply the service at a lower price.

48The price of the drying service must therefore include the normal processing costs, with the result that the VAT charged on that price reflects the full value of the supply.

49The aid passed on to the producer reduces the cost to the latter of dried fodder. However, the reduction does not take effect when the price of the taxable supply is paid. It takes effect after the event, following payment of a price reflecting the full value of the supply.

50If the aid finally paid to the producer of green fodder were also included in the taxable amount, the consequence would be overtaxation of the drying operation, which is at odds with the objective of Article 11(A)(1)(a) of the Sixth Directive.

51On those grounds alone and without any need to consider whether the other conditions for including the aid in the taxable amount are met, it must be held that the Commission's complaint concerning special-order contracts is unfounded.

52In conclusion, since neither of the claims advanced by the Commission is founded, the action must be dismissed.

Costs

53Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party's pleadings. The Commission has been unsuccessful. The Italian Republic is none the less to bear its own costs, since it has not applied for costs to be awarded against the applicant.

54The Republic of Finland and the Kingdom of Sweden, which intervened in support of the form of order sought by the defendant, must bear their own costs, in accordance with Article 69(4) of the Rules of Procedure.

Operative part

On those grounds,

THE COURT (Second Chamber)

hereby:

1. Dismisses the action;

2. Orders the Italian Republic to bear its own costs;

3. Orders the Republic of Finland and the own costs.

Timmermans Gulmann

Cunha Rodrigues

Delivered in open court in Luxembourg on 15

R. Grass

Registrar Kingdom of Sweden to bear their

Puissochet

Colneric

July 2004.

C.W.A. Timmermans

President of the Second Chamber

OPINION OF ADVOCATE GENERAL GEELHOED delivered on 27 November 2003 1

I — Introduction

1In these four cases, which I shall deal with together, the Commission of the European Communities seeks a declaration from the Court that a Member State — the Italian Republic in Case C-381/01, the Republic of Finland in Case C-495/01, the Federal Republic of Germany in Case C-144/02 and the Kingdom of Sweden in Case C-463/02 — has failed to fulfil its obligations under Article 11 of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment. 2 Pursuant to Council Regulation (EC) No 603/95 of 21 February 1995 on the common organisation of the market in dried fodder, 3 flat-rate aid is granted to processing undertakings for dehydrated and sun-dried fodder crops. At issue in all four cases is whether the flat-rate aid for dehydrated and

1 — Original language: Dutch.

2 — OJ 1977 L 145, p. 1.

9 3 — OJ 1 95 L 63, p. 1.

sun-dried fodder crops should be subject to value added tax.

II — Facts and procedure

2In November 1998 the Commission, having concluded that failure to charge VAT on aid granted under Regulation No 603/95 constituted an infringement of Article 11(A)(1)a of the Sixth Directive, sent letters of formal notice to the Italian Republic, the Federal Republic of Germany, the Republic of Finland and the Kingdom of Sweden, inviting them to submit observations within two months. The Member States responded to the Commission's position, expressing their objections. Reasoned opinions from the Commission followed in July, August and September 1999, in which the Member States were invited to take the necessary measures within two months of the notification.

3On 4 October 2001, 21 December 2001, 17 April 2002 and 23 December 2002 the Commission brought proceedings before the Court of Justice of the European Communities under the second paragraph of Article 226 EC against the Italian Republic, the Federal Republic of Germany, the Republic of Finland and the Kingdom of Sweden respectively. In each case it sought a declaration that the Member State, by failing to charge VAT on aid granted under Council Regulation (EC) No 603/95, had failed to fulfil its obligations under Article 11 of the Sixth Directive, and to order it to pay the costs. The Member States ask the Court to dismiss the applications, and to order the Commission to pay the costs. 4

III — Legal framework

A — The rules governing the grant of aid to the dried fodder sector and their application in the past

4On 22 May 1978 the Council of the European Communities adopted Regulation (EEC) No 1117/78. 5 That regulation,

4 — The Italian Republic is supported by the Kingdom of Sweden and the Republic of Finland. The Republic of Finland is supported by the Federal Republic of Germany and the Kingdom of Sweden. The Federal Republic of Germany is supported by the Kingdom of Sweden and the Republic of Finland. The Kingdom of Sweden is supported by the Republic of Finland.

5 — Council Regulation (EEC) No 1117/78 of 22 May 1978 on the common organisation of the market in dried fodder (OJ 1978 L 142, p. 1), amended by Regulation No 3496/93 (OJ 1993 L 319, p. 17).

6 together with Regulation (EEC) No 1417/78 of 19 June 1978 (based on Regulation (EEC) 7 No 1117/78) and Regulation No 1528/78 of 30 June 1798, provided for the payment of aid for the production of dried fodder from plants grown in the Community.

5It is apparent from the recitals in the preamble to Regulation No 1117/78 that when it was adopted, dried fodder production in the Community was noticeably less than the demand for it, especially in the case of animal fodder. In order to encourage production, a system of flat-rate aid for producers was instituted, accompanied by a system of supplementary aid intended to ensure that producers would always be able to sell the fodder they produced at a predetermined guide price. The supplementary aid was to be equal to a certain percentage of the difference between the world market price and the guide price. The details of the scheme are set out in Articles 3, 4 and 5 of Regulation No 1117/78.

6The predictable consequence of the unlimited production aid was overproduc tion of dried (green) fodder within the Community. This led, in 1995, to the common organisation of the market in dried

6 — Council Regulation (EEC) No 1417/78 of 19 June 1978 on the aid system for dried fodder (0J 1978 L 171, p. 1), amended by Regulation (EEC) No 1110/89 (OJ 1989 L 18, p. 1).

7 — Commission Regulation (EEC) No 1528/78 of 30 June 1978 laying down detailed rules for the application of the system of aid for dried fodder (OJ 1978 L 179, p. 10).

fodder being amended by Regulation (EC) 8 No 603/95 and Regulation (EC) No 785/95. The latter sought to restrict subsequent flat-rate aid granted for the production of dried fodder to a maximum amount set out in Regulation No 603/95. The supplementary aid was abolished altogether. 9 In addition, the regulation in question draws a distinction between sun-dried and dehydrated fodder. As processing costs for sun-dried fodder are lower than for dehydrated fodder, the flat-rate aid for the former is substantially lower than for the latter.

7Articles 4 and 5 of Regulation No 603/95 establish a mechanism designed to limit the subsidised production of dried fodder; its principal characteristics are as follows:

— a maximum guaranteed quantity (MGQ) of sun-dried and dehydrated fodder is established for each marketing year;

8 — Commission Regulation (EC) No 785/95 of 6 April 1995 laying down detailed rules for the application of Council Regulation (EC) No 603/95 on the common organisation of the market in dried fodder (OI 1995 L 79. p. 5).

9 — Article 4 of Regulation No 603/95 lays down the maximum quantities of dried fodder eligible for aid. Amended by Council Regulation (EC) No 1347/95 of 9 June 1995 amending Regulation (EC) No 603/95 on the common organisation of the market in dried fodder (OJ 1995 L 131, p. 1). The text as amended reads as follows: (Article 4(1)): 'A maximum guaranteed quantity (MGQ) per marketing year of 4 412 400 tonnes of dehydrated fodder for which ... aid ... may be granted is hereby established'; (Article 4(3)): A maximum guaranteed quantity (MGQ) per marketing year of 443 500 tonnes of sun-dried fodder for which. ... aid ... may be granted is hereby established'.

— the MGQ is then divided between the Member States, each being allocated a national guaranteed quantity (NGQ);

— if in any marketing year the MGQ is exceeded, the flat-rate aid payable is calculated as follows:

— for the first 5 % by which the MGQ is exceeded, the aid is reduced in all Member States by an amount which is proportionate to that excess;

— for any excess beyond 5% additional reductions are made in any Member State in which production exceeds the NGQ increased by 5 %, proportionate to this excess.

8These adjustments are intended to ensure that total expenditure is no higher than it would be if the MGQ were not exceeded.

9Article 9 of Regulation No 603/95 provides that the flat-rate aid is to be granted to undertakings which engage in one of the following activities:

(a) undertakings which have concluded contracts with producers of fodder for drying;

(b) undertakings which have processed their own crops or, in the case of groups, those of their members;

(c) undertakings which have obtained their supplies from legal or natural persons providing certain guarantees to be determined, who have concluded contracts with producers of fodder for drying.

10It is apparent from the eleventh recital of the preamble to Regulation No 603/95 that, in certain cases, the granting of aid is to be conditional on the conclusion of contracts between producers and processing under 10 takings this is in order to encourage a regular supply of green fodder to processors, and to enable producers to benefit from the aid scheme.

10 — To qualify for aid, the processing undertakings must have obtained the fodder from producers, groups of producers or buyers approved by the competent authorities of the Member States.

11If the processing undertaking engages in activity (a), it is under an obligation to pay the producers the aid which it receives for the quantities processed under the contracts. 11 Regulation No 603/95 does not specify how the aid is to be passed on to the producers. In the case of activity (b) processor and producer are one and the same; they cannot be distinguished one from the other. If the processing undertaking performs activity (c), the subsidy granted goes to the processing undertaking itself.

12Before the subsidy is granted, the dried fodder must have left the undertaking (see Article 8 of Regulation No 603/95). Article 3 (1) of Regulation No 785/95 defines more

11 — Article 11(2) of Regulation No 603/95 reads as follows: 'Where contracts as referred to in the first indent of Article 9 (c) are special-order contracts for the processing of fodder supplied by the producers, they shall specify at least the area whose crop is to be delivered and include a clause laying down an obligation on processing undertakings to pay the producers the aid specified in Article 3 which they receive for the quantities processed under the contracts.'

precisely when fodder 'leaves the under 1 taking; 2 Article 3(2) stipulates that dried fodder which has left a processing undertaking may not be readmitted within the precincts of the same or any other undertaking or any storage place.

B — The content of the Sixth Directive, particularly Article 11(A)la, and its drafting history

13The principle on which VAT is based is stated in the following terms in Article 2 of 13 the First Directive:

12 — 'For the purposes of this regulation, in order to obtain entitlement to the aid referred to in Article 3 of Regulation (EC) No 603/95, the products referred to in Article 2(1) shall be considered to have left the processing undertaking where: (a) they leave in the unaltered state: — the precincts of the processing undertaking, — where the dried fodder cannot be stored in those precincts, any storage place outside them offering adequate safeguards for the purposes of checking the fodder stored and which has been approved in advance by the competent authority, — in the case of mobile drying equipment, the equipment in which the dehydration is carried out and, if the dehydrated fodder is stored by the person having dried it, any storage place which satisfies the conditions of the second indent; or (b) they leave the precincts or any storage place referred to at (a) having been mixed within the processing undertaking with raw materials, other than those specified in Article 1 of Regulation (EC) No 603/95 and those used for binding, with a view to the manufacture of compound feed, and, at the time thev leave the processing undertaking, are of sound and fair merchan table quality meeting the requirements for being placed on the market as feedingstuffs and have the following characteristics: ...'

13 - First Council Directive (67/227/EEC) of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967, p. 14). 'The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.'

14The purpose of the deduction rules is to preserve fiscal neutrality — the central feature of the VAT system — by ensuring that the tax paid by the final consumer remains the same, irrespective of the number of links in the production chain for the product in question.

14

15Under Article 2 of the Sixth Directive, a supply of goods or services effected for consideration by a taxable person acting as such is subject to VAT. According to Article

14 — Save where otherwise indicated, the provisions referred to below are from the Sixth Directive.

4(1), a taxable person is a person who carries out an economic activity, whatever the purpose or result of that activity.

16Article 11(A)(1)(a) of the Sixth Directive defines the taxable amount for VAT within the territory of a country as follows:

'in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, 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;

17It is apparent from the history of the application of the Sixth Directive that determining what was covered in practice by the concept of 'subsidies directly linked to the price of ... supplies' has posed a major problem for the Community legislature.

18In its First Report on the application of the common system of value added tax, submitted on 14 September 1983, the 15 Commission noted:

'Article 11(A)(1)(a) of the Directive stipulates that subsidies received by a taxable person which are "directly linked to the price" of the supplies made by that person must be included in the taxable amount as components of the prices paid by third parties. While it is relatively easy to decide straight away that subsidies are "directly linked to the price" when their amount is determined either by reference to the selling price of the goods or services supplied, or in relation to the quantities sold, or again in relation to the cost of goods or services supplied to the public free of charge, it is extremely difficult to decide in the case of other types of subsidy such as deficit subsidies or operating subsidies, which are paid with the aim of improving a firm's economic position and which are granted without specific reference to any price. The absence of any substantial difference between these two types of subsidy (those "directly linked to the price" are usually also aimed at improving a firm's position), together with the fact that a Member State can convert a subsidy of the first type into a subsidy of the second type, illustrate the fragility of a distinction based on purely formal criteria (the manner in which the subsidy is granted) and thus the inadequacy of the Directive in this respect.'

15 — First Report from the Commission on the application of the common system of value added tax, submitted in accordance with Article 34 of the Sixth Directive (77/388/EEC) of 17 May 1977, COM(83) 426 final, 14 September 1983, p. 37.

19In its Second Report on the application 16 of the common system of value added tax, the Commission noted that the expression 'subsidies directly linked to the price' could be interpreted only in a strict and literal sense and that a subsidy was to be included in the taxable amount only if the three following conditions were met:

(a) the subsidy constituted the consideration or part of the consideration;

(b) the subsidy was paid to the supplier;

(c) the subsidy was paid by a third party.

20 Finally: in interpreting the provisions of the Sixth Directive, as is apparent from the Court's case-law, the following basic principles must be borne in mind. First, the concepts defining the scope of VAT must be construed broadly; exemptions, by contrast, must be interpreted narrowly. Secondly, the provisions of the directive must be interpreted strictly so as to promote equality of fiscal treatment, and thereby counter distortion of competition. Thirdly, the principle of fiscal neutrality must be kept in mind. By means of that principle the Community legislature seeks to ensure that there is

16 — Second Report from the Commission to the Council on the application of the common system of value added tax, submitted in accordance with Article 34 of the Sixth Directive (77/388/EEC) of 17 Mav 1977, COM(88) 799 final.

20December 1988, p. 26.

completely neutral taxation of all economic activities, whatever their purpose or result, provided that the activities in question are as such subject to VAT. In fact, the principle of equality of fiscal treatment and the principle of fiscal neutrality are comparable concepts, though they are applied in different contexts — the former being used where more than one State is involved, while the latter refers to a situation arising within a Member State.

IV — Observations of the parties

A — The Commission's complaints

21The Commission considers that one of the most important characteristics of the aid granted to the processing undertakings is that it is based on the amount of dried fodder produced.

22Next, the Commission refers to the various ways in which the processing undertakings can operate (see point 9).

23It considers that undertakings which process their own crops or, in the case of groups, those of their members, not for consideration, do not engage in taxable transactions within the meaning of Article 2 of the Sixth Directive; their activities therefore fall outwith the scope of VAT, and should not be taxed.

24Conversely, buying fodder crops from producers, processing them and selling them on to third parties must be deemed to constitute a supply of goods within the meaning of the Sixth Directive. Processing the product for the producers and returning it to them as the processed product without any transfer of title having occurred must be deemed to constitute the provision of a service. Since the processing undertakings perform an economic activity it follows that they are taxable, so activities (a) and (c) should be subject to VAT.

25The essential question then is whether aid granted pursuant to Regulation No 603/95 should similarly be subject to VAT.

26The Commission considers that three conditions must be met for a subsidy to be taxable:

(a) it must be paid to whoever supplies the goods or service;

(b) it must be paid by a third party, not the supplier of the goods or service;

(c) there must be a direct link between the subsidy and the price of the goods or service.

In the Commission's view all three conditions have been fulfilled.

27First, the requirement that the subsidy be paid to whoever supplies the goods or service. It is the processing undertaking which supplies the goods or service, and which is also the beneficiary of the subsidy. That, the Commission suggests, may be inferred from the words at the beginning of Article 9 of Regulation No 603/95: 'The aid provided for in Article 3 shall be granted only to undertakings processing the products

28In response to observations by the Member States to the effect that the aid also benefits producers, the Commission addresses what it sees as the fundamental distinction between a legal beneficiary and the potential economic significance of the aid. The subsidy granted may produce additional economic effects within the production cycle either for producers of green fodder, or for purchasers of dried fodder. When processing undertakings have concluded special-order contracts for the processing of fodder supplied by the producers, Community legislation requires the former to transfer the aid received to the latter. Neither the possibility that a subsidy may also benefit other undertakings, nor the processing undertaking's duty to transfer the aid received to other parties can alter the fact that the processing undertaking is the beneficiary of the aid. Admittedly, from an economic point of view, the group of beneficiaries is wider; from a legal point of view, though, only the processing undertakings (as the suppliers of goods and/or the providers of a service) are the beneficiaries of the subsidy.

29The requirement that the products have left the processing undertaking has to be met before the subsidy is granted (Article 8 of Regulation No 603/95). Prompted by the observations made by the Member States, the Commission states that the concept of 'leaving the processing undertaking' is not the same as 'the supply of goods' within the meaning of Article 2 of the Sixth Directive. In practice, though, the two concepts tally. Accordingly the subsidy may be seen as consideration for the supply of goods or provision of a service; it is consequently taxable.

30In response to the German Government's argument that under Article 3(1)(a) of Regulation No 785/95 the storage place for the dried fodder may be located outside the precincts of the processing undertaking, and that in consequence 'leaving the processing undertaking' could not be assimilated to the supply of goods, the Commission states that the essential criterion for the taxability of the subsidy for dried fodder is that the product in question should ultimately be sold, and that storage of the dried fodder is no more than a stage preceding its eventual sale.

31The second condition is that the subsidy be paid by a third party, and not, therefore, by the supplier of the goods or services. The Commission considers that this condition, too, has been met. The competent body granting the subsidy is not the supplier of the goods or services.

32The third condition is that, pursuant to Article 11(A)(1)(a) of the Sixth Directive, the aid is to be included in the taxable amount if it is directly linked to the price of the goods or service. That link must be precisely quantified or ascertainable: the aid is granted if, and to the extent that, the goods or service are sold on the market. Thus the subsidy is directly linked to the price.

33At the hearing, the Commission explained that in practice, the subsidy enabled the processing undertakings to sell the dried fodder at the world market price. Without the aid the price would be higher, because of the processing undertakings' high production costs. The aid is therefore a component of the price; that accords with the aim of Article 11(A)(1)(a) of the Sixth Directive, that a subsidy be taxable when it is a component of the consideration received for the sale of the goods or provision of the service.

34The Commission asserts that even if it is not possible to identify the amount corresponding to the subsidy contained in the consideration for every individual transaction, the taxable amount consists of the consideration obtained plus the total amount of aid received for the supply of dried fodder, or for drying green fodder.

35The Commission observes further that in its view there is no significance in the fact that the same amount of aid is granted for supplying dried fodder, and for drying green fodder. After all, the economic objective is the same in both cases: to ensure sufficient Community production of dried fodder at a price acceptable to purchasers. It is therefore logical for the same amount of aid to be granted in both cases, and for such aid to be taxed.

36Nor do rules which require the amount of the aid to be adjusted in the event of the MGQ being exceeded negate the existence of 17 a direct link between aid and price. The purpose of the aid is to support the production of dried fodder. The fact that the effect of the aid is limited as a result of account being taken of predetermined production levels does not preclude the aid having a direct effect on the price.

37It is likewise not significant that the payment of the subsidy forms no part of the contract for the sale of dried fodder between a processing undertaking and a purchaser. Subsidies from public funds are granted by a competent body to a beneficiary in a context governed by public law. By their very nature they cannot be a subset of any conditions of sale agreed between parties; such matters are governed by private law.

38The above analysis thus bears out the Commission's view that there is a direct relationship between subsidy and price. It follows that the subsidy must be included in the taxable amount. That view, the Commission believes, is confirmed in the judgment in Office des produits wallons. 18

17 — It is clear from the third recital of the preamble to Regulation No 603/95 that the aim of these rules is to limit Community dried fodder production.

18 — Case C-184/00 Office des produits wallons [2001] ECR I-9115.

B — Observations by the Member States

39The Member States contest the Commission's view that the processing undertaking must be deemed to be the sole beneficiary of the aid. It is apparent from Article 11(2) of Regulation No 603/95 that where contracts are special-order contracts for the processing of fodder supplied by the producers, there is an obligation on processing undertakings to pay the producers the aid which they receive for the quantities processed under the contracts. The provision in question thus also refers to the producers as beneficiaries of the aid granted. Contrary to what the Commission asserts, the processing undertaking is not the sole legal beneficiary.

40Admittedly, Article 9 of Regulation No 603/95 provides that the aid shall be granted only to undertakings processing fodder. However, the sole purpose of that provision is to simplify administrative procedures. The processing undertaking acts as an intermediary, and is not entitled to retain the aid if it processes fodder for the producers.

41The Member States contend that it is important to know who the beneficiaries of the aid are, since that is a significant factor when determining whether there is a direct link between the subsidy and the price of the product. 19

42The Member States discern no suggestion whatsoever in Regulation No 603/95 that the aid must benefit the purchaser of the 20 dried fodder, by reducing the price. Hence the aid does not affect the price of the dried fodder; it achieves its purpose at an earlier stage, enabling producers of fresh fodder to seek a higher price for their products. In the case of special-order contracts for the processing of fodder supplied by the producers, it is the producers themselves who benefit directly from the aid. Where this is the case, the processors may not include the aid which they have already received (and passed on) in the price which they charge for drying the green fodder. The aim of the subsidy is therefore to reduce production costs.

19 — See also Office des produits wallons (cited above in footnote 18, paragraph 14). '[In order] to establish the existence of a direct link between the subsidy and the goods or services at issue ... it [is] necessary to verify at an early stage that the purchasers of the goods or services benefit from the subsidy granted to the beneficiary. The price payable by the purchaser must be fixed in such a way that it diminishes in proportion to the subsidy granted to the seller or supplier of the goods or services, which therefore constitutes an element in determining the price demanded by the latter.'

20 — See also the eleventh and twelfth recitals in the preamble to Regulation 603/95: 'Whereas, in order to encourage a regular supply of green fodder to processors and to enable producers to benefit from the aid scheme, the granting of aid should in certain cases be conditional on the conclusion of contracts between producers and processing undertakings; whereas the contracts should, on the one hand, promote regular supplies for the processing undertakings and, on the other, permit the producers to benefit from the aid; whereas, to this end, it should be laid down that the contracts include certain information'.

43The Member States list further reasons why, in their view, there is no link between the subsidy and the price at which dried fodder is sold.

— Entitlement to aid arises once the fodder has left the processing undertaking, and various quality requirements have been met. The granting of aid is not dependent on a taxable transaction occurring (the supply of the dried fodder to a purchaser).

— Through the subsidy, the Community seeks to provide processors with regular supplies, and to safeguard producers' incomes; the aim is not to ensure that dried fodder is supplied to purchasers at a price acceptable to them.

— The aid is calculated on the basis of the amount of dried fodder which has left the undertaking. The price received by the processing undertaking for the dried fodder fluctuates with the market price, but the aid remains constant.

— The same amount of aid is paid for supplying dried fodder, and for processing green fodder, though the costs incurred are not the same.

— Regulation No 603/95 sets a limit on the subsidy received. The Member States argue that such a cap precludes any direct link between subsidy and price, since the final amount of aid to be granted is not ascertainable at the time 21 the chargeable event occurs.

44At the hearing, the Finnish Government explained why it considers that there is no direct link between subsidy and price. Like the Commission, it points out that the subsidy enables the processors to sell the dried fodder at the world market price. If no subsidy were granted, production costs would rise, the Finnish processing undertakings would have to charge more, and purchasers of dried fodder would buy from competing undertakings selling at the world price. Hence the Finnish processors are not in a position to raise their prices. Since the processors sell their fodder at a price which remains the same with or without the

21 — The Member States consider that this view is confirmed by Office des produits wallons (cited in footnote 18), paragraph 13.

subsidy, any link between product and subsidy is at most indirect. The subsidy does not in practice influence the market price — it merely compensates for the high production costs.

V — Assessment

A — General

45Mindful — inter alia — of the drafting history of the legislation in question, I proceed from the premiss that the taxation of subsidies is an exception.

46It is only where a subsidy is 'directly linked to the price of ... supplies' that it is included in the taxable amount defined in Article 11(A)(1)(a) of the Sixth Directive. For all other subsidies the position is that they are not included in the taxable amount, and are hence not taxable under Article 11(A)(1) (a) of the Sixth Directive. Were this not so, VAT would fall to be imposed on other forms of subsidy such as investment subsidies or operating subsidies — and that would not accord with the general system of VAT.

47In the present case, on the basis of what I shall set out below, there can be no question of Article 11(A)(1)(a) of the Sixth Directive requiring VAT to be charged on the subsidy granted in the fodder sector. There are two reasons why this is so. The first is that taxing the subsidy would jeopardise the neutrality of the VAT system; the second is that the requisite link between the subsidy and price obtained for the product is not present.

48One might, with some justification, take the view that there is little point in imposing VAT on subsidies. By doing so a public authority simply takes back with one hand a percentage of the money which it has 22 granted with the other. This could only be justified if not charging VAT were to produce an unsatisfactory outcome. Such a situation might arise if, as a result of an untaxed subsidy being fully and directly reflected in the lower price of the transactions in question, the total amount of tax paid were reduced. Where a subsidy which has demonstrably affected the price of the transactions leads to the price of goods being reduced, the ensuing reduction in tax revenue may be offset by taxing the subsidy. Imposing VAT on the subsidy ensures that tax revenue is the same as it would be in a situation in which no subsidy was granted.

22 — See also Advocate General Jacobs' Opinion in Case C-384/95 Landboden-Agrardienste [19971 ECR I-7387. paragraphs 12 and 13.

B — Preliminary observation

49As a general rule, it is illogical to charge VAT on a subsidy unless the recipient of the subsidy is also the final consumer. The common system of value added tax has created a tax on consumption; it follows that a taxable person should charge and pay tax on the value of goods they have supplied or a service they have performed. That value is a subjective value since the basis of assessment for goods or services is the consideration actually received and not a value assessed according to objective criteria, as the Court held in Coöperatieve Aardappelenbewaar 23 plaats.

50If a taxable person receives a subsidy directly related to the price of the transactions involved, Article 11(A)(1)(a) of the

23 — Case 154/80 [1981] ECR 445. A cooperative association ran a potato storage warehouse which its members paid an annual storage charge to use. In certain years the association decided not to levy the charge, since the cooperative already had sufficient funds available following an advantageous transaction involving real estate. As no charge was imposed, the value of the cooperative's shares declined, which affected the net worth of the shareholder members. Could the decline in the value of the members' shares in the cooperative be deemed to constitute consideration within the meaning of Article 8 of the Second Directive as being payment for the service (storing the potatoes)? The Court held that it could not: no sum of money or consideration had actually been received for the storage provided.

Sixth Directive requires him to pay tax on it. I have already explained, at point 14, that the principle of the common system of value added tax is that the burden of the tax is in practice borne only by the consumer at the end of the chain. Accordingly, a taxable person who has paid tax on the subsidy received must be able to pass that charge on to the final consumer.

51In a series of judgments beginning with 24 Rompelman, the Court has held that the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. Since the subsidy is received and the resulting VAT debt arises and is paid in the context of economic activities, there must be an opportunity to pass that charge on to the final consumer — only thus can the principle of the complete neutrality of value added tax be maintained.

52However, if VAT is paid on the subsidy received, the consequence for the final consumer of applying the aforementioned principle is that he will then pay tax on the

24 - See, inter alia, Case 268/83 Rompelman [1985] ECR 655, paragraph 19; Case C-37/95 Ghent Caal Terminal [1998] ECR I-1, paragraph 15; Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 44, and Case C-98/98 Midland Bank [2000] ECR I-4177, paragraph 19.

specific subjective value of the consideration actually received, that is, the actual value as determined inter alia by the subsidy (with its effect of reducing the price), plus the taxation paid on the subsidy. Thus one desired outcome is indeed achieved — the tax lost to the tax authority (because the actual subjective value of the consideration received is reduced by the subsidy) is duly offset by the taxation of the value of the subsidy. Against that is the fact that such a system would constitute a departure from the maxim laid down in Coöperatieve 25 Aardappelenbewaarplaats, that the basis of assessment on which VAT is levied is the consideration actually received.

53Hence Article 11(A)(1)(a) of the Sixth Directive should be construed as an exception to the general principles of the common system of value added tax. As such it should be interpreted and applied restrictively and strictly.

54A consequence of restrictive interpretation is that the provision should only be applied to subsidies directly reflected in the price of the transaction. In Office des 26 produits wallons the Court has given some guidance on this point; I shall discuss this in more detail below at points 71 to 76.

25 — Cited in footnote 23.

26 - Cited .it footnote 18.

55Strict interpretation means taxing the subsidies granted only to the extent that they are reflected in the price of the transaction. After all, if a subsidy which has the effect of reducing a price is taxed in full, but is then only reflected in part in the price paid by the final consumer, the result is that the competent tax authority receives more VAT than it loses as a result of the subsidy. Such overcompensation is at odds with the tenor of the exception constituted by Article 11(A) (l)(a) of the Sixth Directive, the sole aim of which is to compensate for the amount of tax actually lost as a result of the subsidy.

56Moreover, in such a situation the taxable person is overtaxed, since he must pay VAT on the increased consideration (assuming the subsidy is partially reflected in the end price), and on the fully-taxed subsidy. Ex hypothesi he is liable for more VAT than if no subsidy had been granted in the first place.

57To ensure that any VAT imposed on subsidies accords with the general scheme of the tax, including the limited exception contained in Article 11(A)(1)(a) of the Sixth Directive, it is therefore necessary to ascertain precisely whether, and if so to what extent, the subsidies are reflected in the price of the product at the stage of final consumption. In other words, the tax authorities involved must be able to show that they have suffered a loss as a result of the subsidy, and must then be able to show plausibly what the extent of such a loss would have been.

C — VAT: a neutral system

58A flat-rate subsidy is granted for the production of dried fodder; as Article 9 of Regulation No 603/95 indicates, the subsidy is based on the processing of green fodder into dried fodder. As I have briefly indicated above, at point 9, the subsidy may fall to be granted in three situations:

— where there is integrated production: the processor processes his own production, or that of his members;

— where the processor acts as a 'contract worker': the producer's green fodder is processed (dried) for him and subsequently returned to him;

— where the processor buys in green fodder from the producers, processes it and then sells it on.

59The Commission's premiss is that in the first of these three situations no VAT can be imposed: the processing of the green fodder does not constitute an independent economic activity, and no supplies of goods or services chargeable to VAT occur within an integrated production unit. It is therefore not possible to impose VAT on the processing of green fodder to dry fodder. The defendants subscribe to this analysis; so do I. No goods are supplied, no services performed: no VAT can be charged.

60On the second situation there is disagreement. The Commission considers that the subsidy is paid to the processing undertaking in order to support the service performed for the producer. The processor is the legal beneficiary of the subsidy. The fact that Regulation No 603/95 requires that the subsidy be passed on to the producer is merely a reflection of the economic effects that a subsidy can produce within a chain of production. Thus a service is performed for the producer, and the subsidy granted for this must therefore be taxed.

61In arguing thus, however, the Commission creates the legal fiction that the subsidy is paid to the processing undertaking as an incentive to provide the service (the processing). That is not in fact the case.

62The subsidy is granted for dried fodder which has left the processing undertakings and which meets certain quality require 27 ments. Additionally, Article 11(2) of Regulation 603/95 provides that the processing undertaking is under an obligation to pay the producers the aid which it receives for the quantities processed under the contracts. Since the regulation itself states expressly that the producers are the beneficiaries of the aid, it follows that the processing undertaking itself cannot be the beneficiary. The processing undertaking merely functions as an intermediary which passes the subsidy on to the producer. The requirement that the fodder must have left the processing undertaking in order to qualify for the aid supports that contention. Moreover, there is no suggestion in the regulation that the subsidy is granted for the provision of the service of processing the green fodder. After all — as is apparent from what I have already stated — the subsidy is granted to benefit the producer by reducing production costs. There is no

27 — Article 8 of Regulation No 603/95.

basis whatsoever in Regulation No 603/95 for the legal fiction postulated by the Commission; accordingly it cannot be accepted.

63I would add here that the Commission itself, in its Second Report on the application 28 of the common system of value added tax, stated that the subsidy should be included in the taxable amount only if (among other conditions) the subsidy is paid to the supplier of the goods or service. In this situation, the subsidy, as required by Regulation 603/95, accrues to the original producer and not to the processing undertaking. Moreover, the subsidy is not paid to the subsidised producer for the supply of particular goods or the provision of a particular service; rather it is granted after a service has been performed for the subsidised producer, and in order to reduce his production costs.

64The Community legislature could have chosen to grant the subsidy to the processing undertaking in order to promote the processing of fodder. The full subsidy would then have had to go to the processing undertaking. However, it is apparent from the preamble to the old regulation (No 1117/78) that the legislature opted expressly to grant the subsidy to producers to promote the production of green fodder.

28 — Cited in footnote 16.

65It follows that the Commission cannot maintain that the subsidy is paid to the processor in order to encourage the processing of fodder. Its contention that the subsidy could be taxed at the processing undertaking is therefore untenable.

66Finally, the third situation: here, it is suggested, the subsidy could be taxed on the basis of Article 11(A)(1)(a) of the Sixth Directive. The processing undertaking processes the green fodder having purchased it from the primary producers, and subsequently sells it as dried fodder to third parties, who will pay a price for it. In addition, the processing undertaking receives a subsidy which may be reflected in a lower selling price.

67It should be stated at once that it is very unlikely that the subsidy will be reflected in a lower selling price for the dried green fodder. In practice, the principal effect of the subsidy will necessarily be to increase the purchase price paid to the primary producer for the green fodder. After all, if the processor failed to pass on a substantial proportion of the subsidy to the primary producer in the form of a higher price, the latter might opt to have their products dried by a contract processor, so as to be entitled to receive the subsidy directly. Such an outcome is entirely compatible with the scheme and purpose of Regulation No 603/95, which seeks to promote the production of dried fodder, however the production chain is organised.

68Thus the case argued by the Commission leads to an outcome which is unacceptable in terms of the scheme and purpose of Regulation No 603/95: how the production chain is organised would determine the fiscal treatment of the subsidy (not taxed in the first situation, taxed in the two others), even though the purpose of the subsidy is the same in all three situations, namely to encourage the production of fodder through financial support for the production process. Moreover, as I have already shown, in the second situation, the subsidy could not possibly be taxable, given the factual and legal position of the processor. Only in the third situation is it conceivable that the subsidy might be taxed. However, for that to be the case, the subsidy would have to be reflected in the selling price. I have already indicated that such a scenario is highly improbable; moreover it entirely disregards the fact that the subsidy paid to the processor is not intended to facilitate the sale of the processed product by lowering the price, but, quite the contrary, is designed to enable the processor to pay the primary producer a higher price.

69An equally unacceptable outcome results when the Commission's case is considered alongside the common system of value added tax. It follows from the Commission's line of argument that the taxation of aid for the production of dried fodder will vary, depending on where processing occurs in the whole chain of production. The Commission is thus infringing the principle of neutrality, a central principle of the VAT system, according to which the total VAT payable at the final consumption stage must remain the same irrespective of the number of links in the chain of consumption. For that reason alone the Commission's claim must be dismissed.

D — The need for a link between a subsidy and the price paid for the goods

70It is apparent from the Commission's Second Report on the application of the common system of value added tax 29 that the subsidy must constitute the consideration or part of the consideration. However, 3 in Office des produits wallons, 0t he Court construed the concept of 'subsidies directly linked to the price of ... supplies' more broadly.

29 — Cited in footnote 16.

30 - Cited in footnote 18.

71The issue in that case was whether the subsidy paid by the Walloon Region to Office des produits wallons ASBL for the advertising and sale of local products should be subject to VAT. More specifically, the issue was whether VAT should be imposed on operating subsidies which were not paid directly for the supply of goods or services, but which might lead to the goods or services being made available at a lower price. The Court gave a number of indications as to how that question should be answered.

72First, the subsidy must be paid specifically to the subsidised body to enable it to supply particular goods or provide particular services. Only in that case can it be deemed to constitute consideration for the supply of goods or services, and therefore be taxable. 31

73Secondly, the price of the goods or services must, in principle, be determined not later than the time of the taxable event.

31 — 1 must nuke it clear that the transactions referred to in Article 11(A) of the Sixth Direttive are not transactions carried out for the benefit of" the public authority which grants the subsidy. Article 11(A) deals with situations involving three parties — the public authority granting the subsidy, the body which receives it, and the purchaser of the goods or recipient of the service supplied by the subsidised establishment.

74Thirdly, it must be established that the undertaking to pay the subsidy made by the person who grants it has as its corollary the right of the beneficiary to receive it, since a taxable supply has been made by the latter. That link between the subsidy and the price must appear clearly following analysis of the actual circumstances underlying the payment of that consideration. On the other hand, it is not necessary for the price of the

76 As may be inferred from my introductory comments, I consider that the scope of the concept of 'subsidies directly linked to the price of... supplies' must be interpreted in such a way that tax can be imposed on subsidies only to the extent that these are reflected in the price of the transaction. When considering the possible imposition of VAT on subsidies, the limited exception contained in Article 11(A)(1)(a) makes it goods or services — or a part of the price — necessary to ascertain precisely whether, and to be ascertained. It is sufficient for it to be ascertainable.

75The Court's broader interpretation is grounded in the view that the subsidy must have the effect of reducing the price. The Court stated: 'The price payable by the purchaser must be fixed in such a way that it diminishes in proportion to the subsidy granted to the seller or supplier of the goods or services, which therefore constitutes an element in determining the price demanded 32 by the latter.'

32 — 'It is therefore for the referring court to establish the existence of a direct link between the subsidy and the goods or services at issue. That makes it necessary to verify at an early stage that the purchasers of the goods or services benefit from the subsidy granted to the beneficiary. The price payable by the purchaser must be fixed in such a way that it diminishes in proportion to the subsidy granted to the seller or supplier of the goods or services, which therefore constitutes an element in determining the price demanded by the latter. The court must examine, objectively, whether the fact that a subsidy is paid to the seller or supplier allows the latter to sell the goods or supply the services at a price lower than he would have to demand in the absence of subsidy.'

if so to what extent, the subsidies are reflected in the price at the stage of final consumption.

77It is apparent from the regulations described in points 4 to 12 inclusive above that the purpose of granting the flat-rate aid is to promote the production of green fodder. That subsidy granted to the fodder sector may be classified as a production subsidy. Unlike a price subsidy, a production subsidy is not intended to have a direct effect 33 on the selling price. The subsidy is granted on the basis of the amount of processed

33 — Various other types of subsidy may be distinguished, such as operating subsidies, income subsidies and investment subsidies. There is an example of an income subsidy in the 'old' regulation, No 1117/78. Under that regulation, supplementary aid was granted to offset production costs and to enhance competitively vis-à-vis third countries. The new regulations, Nos 603/95 and 785/95, abolished the supplementary aid. The amount of the aid was defined as a percentage of the difference between the world market price and the previously-established guide price. One common feature of all these subsidies is that they are not directly linked to the price of any goods.

fodder, and not as a contribution towards the price of the service. True, the subsidy is confined to a given maximum production quantity, but that fact does not detract from its purpose of promoting the production of fodder in the Community on a lasting basis by bringing down production costs.

78It is apparent from the legislation setting up the system for granting aid for the production of dried fodder in the Community set out above at points 4 to 12 inclusive that Community production of fodder failed to match demand, as production costs in the Community were too high for it to be offered for sale at the world market prices effective at the time.

79The flat-rate subsidy had the effect of reducing production costs, which enabled Community producers to produce cost-effectively at the (world) market prices. This is evidenced by the rapid growth in the share of the Community market accounted for by Community green fodder production. These developments even obliged the Community legislature to limit the amount of production subsidised, in order to prevent overproduc tion.

80It is thus clear that while the subsidy did have an effect on the amount produced in the Community, it was not directly reflected in market prices. This is partly because of the nature of the (world) market for fodder which, as is the case for many agricultural products, is characterised by a large number of small suppliers. They are not strong enough to influence the market in their respective products through their individual market conduct. Individual producers who receive a flat-rate subsidy will not be able to pass it on to final consumers. For them, the ruling market price is a given; it is the price at which they have to offer their goods for sale, subsidy or no subsidy.

81Any effect produced by the subsidy on selling prices is at most indirect. If the total amount of fodder produced with the subsidy were so considerable as to lead to a significant change in supply and demand on the world market, the world market price would be forced down. I consider such a scenario highly improbable, and in any case not determinative for the case brought by the Commission. The subsidy will in any case never be completely reflected in the selling price. Moreover, capping the subsidy is an attempt to forestall precisely the effect described — an effect which would have made the relationship between production costs and selling price even more disadvantageous for Community producers.

82This is all borne out by the nature of the limitation mechanism in Regulation No 603/95, whereby producers receive an advance payment during the marketing year, the final account following once the marketing year is over. The resulting uncertainty makes it inherently improbable that producers would incorporate the production subsidy directly in their selling prices (if indeed they were in a position to do so at all).

83In its observations the Commission states that it is apparent from the selling price of the dried fodder that there is a direct causal link between that price and the aid granted, since the aid enables the processing undertakings to market the dried fodder at the world price. Without the aid the price would be higher, in view of the processors' high production costs.

84It follows from what I have already said that the Commission s position is an untenable one. The mechanism incorporated in Regulation No 603/95 is designed to influence, not the price of the fodder, but the production costs of the producers, so that they can produce at the market price. The result of the subsidy was an increase in the amount produced in the Community capable of being sold at the current price. Without the subsidy, therefore, there would be, not higher market prices, but simply less fodder produced in the Community. Any ensuing shortages could simply be supplied by third-country producers able to sell at world-market prices — as indeed was the case prior to 1978.

85I conclude that the Commission has not even begun to demonstrate a direct causal link between the production subsidy and the prices at which the dried fodder was ultimately sold. As to the requirement (described above at points 55 to 57 inclusive) that for Article 11(A)(1)(a) to apply it is necessary to show how much the subsidy affected the price paid by the final consumer — the Commission never reaches that point at all.

86For these reasons as well, the Commission's application must be dismissed.

VI — Conclusion

87On the basis of the foregoing, I suggest that the Court should:

(a) dismiss the Commission's actions against the Italian Republic (Case C-381/91), the Republic of Finland (Case C-495/01), the Federal Republic of Germany (Case C-144/02) and the Kingdom of Sweden (Case C-463/02);

(b) pursuant to Article 69(2) of the Rules of Procedure, order the Commission to pay the costs of the proceedings;

(c) pursuant to Article 69(4) of the Rules of Procedure, order the Republic of Finland, the Kingdom of Sweden and the Federal Republic of Germany to bear their own costs as interveners.