JUDGMENT OF 14. 1. 1981 — CASE 140/79 CHEMIAL FARMACEUTICI v DAF

In Case 140/79 REFERENCE to the Court under Article 177 of the EEC Treaty by the Pretura, Castell'Arquato, (Italy) for a preliminary ruling in the proceedings pending before that court between

THE COURT composed of: J. Mertens de Wilmars, President, P. Pescatore and T. Koopmans (Presidents of Chambers), Lord Mackenzie Stuart, A. O'Keeffe, G. Bosco and A. Touffait, Judges, Advocate General: H. Mayras Registrar: A. Van Houtte

gives the following

JUDGMENT

Facts and Issues

I — Facts and written procedure

II — Written observations submitted to the Court

Certain questions of fact

The first question

The second question

The facts

The legal aspects

III — Oral procedure

IV — Measure of inquiry

Decision

The jurisdiction of the Court

Substance

Costs

I —. Facts and written procedure

1. A. Is the first paragraph of Article 95 of the EEC Treaty to be construed in such a manner as to render unlawful and therefore prohibited a national system of taxation which provides for the application to a product imported from the EEC (synthetic ethyl alcohol exclusively intended, after denaturing, for chemical and industrial use and therefore not suitable for human consumption) of a special duty far greater than that applied to a domestic product with the same characteristics and the same tariff classification (22.08/300) (ethyl alcohol obtained by fermentation and likewise intended, after denaturing, for chemical and industrial use and not suitable for human consumption) for the sole reason that the raw materials from which the two types of alcohol are extracted are different and the methods of extraction are therefore different? B. Is the national system of taxation unlawful as described above even if, theoretically, it does not apply in a discriminatory manner to the same product with reference to the raw material from which it is extracted, in so far as both imported and home-produced synthetic ethyl alcohol are taxed to the same extent and, similarly, both imported and home-produced ethyl alcohol obtained by fermentation are subject to the same charge?

2. Alternatively, if the answer to Question 1 is in the negative, is the second paragraph of Article 95 of the EEC Treaty to be construed in such a manner as to render unlawful and therefore prohibited — because it protects domestic production to the detriment of Community production — a national system of taxation applied in accordance with the criteria referred to in Question 1 and on the products mentioned in that question, taking into account the fact that the product subject to the greater charge (synthetic ethyl alcohol) is exclusively imported from the other States of the EEC, whilst that subject to the lesser charge (ethyl alcohol obtained by fermentation) is produced in Italy and competes with the former?

II —. Written observations submitted to the Court

(a). Under the Italian legislation ethyl alcohol obtained synthetically from raw materials extracted from the earth, mainly from petroleum, must be denatured and may be used only for chemical and industrial purposes. However, chemically, it is not possible to draw any distinction between alcohol produced synthetically and alcohol obtained by means of fermentation. The latter is normally used for human consumption, in particular the type known as second-grade alcohol which is derived mainly from the distillation of wine, grape marc and fruit; alcohol produced by fermentation and known as first-grade alcohol, being derived from sugar-cane molasses and sugar-beet molasses, can be used for human consumption but can also be denatured and used for industrial and chemical purposes.

(b). All types of alcohol, whether produced by fermentation or synthetically, intended for industrial and chemical uses are exempted from the manufacturing tax and ordinary excise duty which are imposed on alcohol intended for human consumption. In order to prevent any fraud the Italian regulations require alcohol intended for industrial or chemical uses to be denatured under the supervision of the Ufficio Tecnico Imposte di Fabbricazione (Technical Office for Manufacturing Taxes). Article 4 (2) of Decree-Law No 836 of 16 September 1955 increased to LIT 6000 per hectolitre of pure alcohol the rate of the special revenue charge on denatured alcohol, originally fixed at LIT 1000 by Decree-Law No 1200 of 6 October 1948; however, the same provision retained the rate of LIT 1000 per hectolitre for denatured alcohol produced from molasses and material treated as molasses. The rate of the special revenue charge was increased from LIT 6000 to LIT 12000 per hectolitre of pure alcohol by Law No 506 of 18 August 1978. Denatured alcohol produced synthetically is thus taxed much more heavily than denatured alcohol produced by means of fermentation. Italy, however, does not produce any synthetic alcohol.

(a). Denatured ethyl alcohol extracted from mineral products (hydrocarbons) and denatured ethyl alcohol obtained from agricultural products share the same chemical characteristics. The only difference is in the amount of radioactivity which is higher in the case of ethyl alcohol manufactured from agricultural products than in the case of ethyl alcohol extracted from minerals. Thus, as a matter of chemistry and a matter of law, ethyl alcohol of agricultural origin is not just similar but identical to alcohol of mineral origin.

(b). As a result of this similarity between them, those two categories of products constitute a single type or class. Moreover, they come under a single subheading, subheading 22.08 B, of the Common Customs Tariff (ethyl alcohol or neutral spirits, undenatured, of a strength of 80o or higher).

(c). The Italian fiscal legislation singles out a subgroup, namely ethyl alcohol derived from hydrocarbons, solely for the purpose of a protectionist policy which is incompatible with the common market.

(d). The aims of Article 95 of the Treaty have been clearly identified in the decisions of the Court of Justice. That provision seeks to eliminate all obstacles of a fiscal nature which may impede the free movement of goods within the Common Market and to ensure that the application of internal taxation does not have the result that in one Member State products originating in other Member States are subject to taxation in excess of that imposed on similar domestic products or to taxation of such a nature as to afford protection to other domestic products. Although at its present state of evolution Community law does not prohibit Member States from granting tax advantages, such beneficial schemes must, in accordance with the requirements of Article 95, be extended to products originating in other Member States.

(e). As for the question of determining the meaning and scope of the term similar products used in Article 95, it is clear from the case-law of the Court that it is necessary to ascertain whether in the eyes of consumers, at the same marketing stage, two products share similar properties and satisfy the same needs. The similarity therefore relates solely to the characteristics of the products per se, irrespective of any other factor. The decisive factor is not so much the similarity of a product in its various aspects, including the manufacturing process and the raw materials used, but rather the extent to which it is interchangeable with other products as regards consumption thereof.

(f). Article 95 is a rule which supplements the prohibitions laid down in Article 9 et seq. of the Treaty. The concept of a single market is crucial. In relation to Article 95, it means that a product of foreign origin may not be subjected to internal taxation in excess of that imposed on a similar domestic product. The prohibition laid down in Article 95 implies the illegality, from the point of view of Community law, of a tax on ethyl alcohol derived from the distillation of hydrocarbons, a product which exists only as an imported product, charged at a higher rate than the tax which is imposed on the product obtained from agricultural materials, which is commonly produced in Italy.

(g). There is a link between the function and tenor of Article 95 and the prohibition of quantitative restrictions laid down in Article 30 of the Treaty.

(a). Only the first paragraph of Article 95 is applicable to the dispute in the main action, since it is a question of classes of products which are interchangeable and basically identical.

(b). In any case, it must be remembered that the second paragraph of Article 95 seeks to prevent Member States from favouring, by means of measures of a fiscal nature, domestic products to the detriment not of similar products, but merely competing products, from other Member States. That aim must a fortiori be taken into consideration in the context of the dispute in the main action, in which the products at issue are not merely comparable or similar, but identical.

(a). The Commission recalls that pure ethyl alcohol is obtained by distilling products of the soil (cereals, wine, grape marc, fruit, potatoes, sugar-cane, beet, molasses from cane or beet, wood, etc.) or by synthesis of products of the substrata (petroleum or coal). Although the kinds of alcohol are of differing origin, namely agricultural or mineral, they are identical from a chemical point of view (C2H5OH) ; in the finished state their origin can be identified only by means of delicate and complicated chemical analysis based on their degree of radioactivity. Where the degree of purity obtained at the end of the distilling or synthesising procedure is the same, ethyl alcohols are thus perfectly interchangeable and they may all be employed without distinction for the same purposes. Ethyl alcohol is used chiefly in products for human consumption (alcoholic beverages and pharmaceutical and food products) and for industrial purposes (paints, enamels, solvents, cosmetics and perfumes, essences, plastic products etc.). For purely economic reasons the legislation of two Member States, one of which is Italy, expressly prohibits the use of synthetic ethyl alcohol in preparations intended for human consumption.

(b). Denatured alcohol is merely ethyl alcohol to which a denaturing product has been added in order to alter its taste and prevent its use for human consumption. The reasons for denaturing the alcohol are essentially of a fiscal nature, since denatured alcohol intended for industrial use is not liable to the taxation imposed on alcohol intended for human consumption.

(c). Under the Italian tax system denatured alcohol is subject neither to the manufacturing tax nor to ordinary duty. On the other hand, it does bear the special revenue charge, fixed at LIT 1000 per hectolitre of pure alcohol in the case of alcohol produced domestically from molasses, similar substances, sorghum and sugar-cane and at LIT 12000 per hectolitre in the case of other types of alcohol, in particular synthetic alcohol.

(d). On 31 July 1978 the Commission adressed a reasoned opinion to the Italian Republic under Article 169 of the EEC Treaty, inviting the Italian Government to amend the provisions on the special revenue charge within two months so as to make them compatible, with Article 95 of the Treaty. As no action has been taken on that reasoned opinion, the Commission intends shortly to take proceedings before the Court of Justice.

(a). The tax system to which the disputed special revenue charge belongs may be regarded as compatible with the first paragraph of Article 95 of the Treaty only if the more favourable rate of LIT 1000 per hectolitre of pure alcohol were applied to identical or similar products imported into Italy from the other Member States, including denatured ethyl alcohol of synthetic origin.

(b). The first two questions submitted to the Court call for the following answer:

(c). In view of the suggested reply to the first two questions, the third question becomes otiose.

III —. Oral procedure

IV —. Measure of inquiry

1. By order of 6 September 1979, which was received at the Court on 10 September 1979, the Pretura, Castell'Arquato, referred to the Court two questions on the interpretation of Article 95 of the EEC Treaty in order to make it possible to assess whether the system of differential taxation applied by virtue of Decree-Law No 1200 of 6 October 1948, as amended by Decree-Law No 836 of 16 September 1955, and Article 3 of Law No 506 of 18 August 1978 to denatured synthetic ethyl alcohol and to denatured ethyl alcohol obtained by fermentation is compatible with the requirements of the Treaty.

2. These questions have been submitted in the context of civil proceedings concerning the performance of a contract concluded between 18 and 27 July 1978 between the plaintiff in the main action, Chemial Farmaceutici SpA, and a producer and importer of alcohol, DAF SpA, relating to the supply of a consignment of imported denatured synthetic alcohol.

3. The papers in the case reveal that in July 1978 Chemial placed on order with DAF for a limited quantity of denatured synthetic alcohol. DAF drew Chemiaľs attention to the fact that a special revenue charge of LIT 6000 per hectolitre was charged on synthetic alcohol, whilst on its own alcohol produced by fermentation, which was perfectly interchangeable with the synthetic alcohol requested, the special revenue charge was payable at the rate of only LIT 1000 per hectolitre. However, Chemial insisted, for technical reasons, on obtaining alcohol of synthetic origin and by letter dated 18 July 1978 DAF offered it the goods requested at the price of LIT 30000 per hectolitre, including the special revenue charge (LIT 6000 per hectolitre). Chemial accepted that offer by letter dated 27 July 1978 in which a price of LIT 30000 per hectolitre, including the special revenue charge was agreed on. Under the terms of the contract the goods were to have been collected by 15 September 1978.

4. It is not disputed that as a result of the Law of 18 August 1978 the special revenue charge on denatured synthetic alcohol was raised to LIT 12000 per hectolitre. By a letter dated 7 September 1978 DAF informed Chemial of this fact, requesting it to consider the offer of 18 July 1978 as null and void, unless it was prepared to bear the burden of the additional amount of tax. Chemial insisted on performance of the contract according to the terms agreed on, arguing that since imported synthetic alcohol was involved the increase in the tax was illegal as being contrary to the provisions of the law of the European Community, and it commenced proceedings in the appropriate civil court with a view to obtaining performance of the contract.

5. In the national court Chemial put forward the arguments which led it to regard the disputed tax as contrary to the EEC Treaty, drawing attention in particular to the judgment of the Court of Justice of 10 October 1978 in Case 148/77 Hansen & Balle [1978] ECR 1787. In its defence DAF argued that since the contract expressly stipulated that the tax was to be borne by the buyer, the latter must in accordance with the terms agreed on bear any increase occurring between the conclusion and performance of the contract. As regards the alleged illegality of charging the tax in question, DAF observed that it was for Chemial to rely on that illegality as against the appropriate authorities in order to obtain reimbursement of the tax.

6. Having noted the difference in tax treatment introduced by Italian legislation between synthetic alcohol, an imported product which is not produced in significant quantities in Italy, and alcohol produced by means of fermentation, the Pretura considered that the prior resolution of the question of that legislation's compatibility with the provisions of the EEC Treaty could be of decisive importance for the outcome of the dispute before it. It thus decided to submit to the Court two preliminary questions worded as follows :

7. In its oral observations the Italian Government put in issue the admissibility of the request for a preliminary ruling submitted by the Pretura, Castell'Arquato. It raises the question whether the action brought before the national court is not really a fictitious dispute and whether the procedure under Article 177 has not been employed in this case to impeach the Italian State in the absence of any actual dispute giving rise to questions of Community law as between the parties. In these circumstances the Italian Government asks whether the situation should not be compared to that which formed the subject-matter of the judgment of the Court of 11 March 1980 in Case 104/79 Foglia v Novello [1980] ECR 745 in which the Court held that it had no jurisdiction to give a ruling on the questions put by the national court.

8. Making use of the power conferred upon it by Article 60 of the Rules of Procedure, the Court let it be known by a letter dated 28 May 1980 that it wished further information in this respect. Consequently, before reaching a decision it requested the parties to reply to certain questions.

9. Having studied the replies given to those questions the Court considers that in this case it is possible to set aside the doubts expressed by the Italian Government and to broach the substance of the case.

10. The plaintiff in the main action submits that the application of differential rates of taxation to alcohol produced by fermentation and to synthetic alcohol, which in the absence of any production in Italy is solely an imported product, constitutes patent fiscal discrimination which is prohibited by Article 95 of the Treaty. In fact, it is stated, the products are not merely similar within the meaning of that article, but indeed identical and therefore interchangeable so that one may be used for the other without any difficulty. According to the plaintiff, this difference in tax treatment was established by Italian law solely in furtherance of a protectionist policy incompatible with the common market. In this regard it refers to the test adopted by the Court in its judgment of 17 February 1976 in Case 45/75 REWE Zentrale [1976] ECR 181, where it was held that the relationship of similarity, within the meaning of Article 95, exists between products which, at the same stage of production or marketing, have similar characteristics and meet the same needs from the point of view of consumers.

11. The applicant's position is supported by the Commission which has expressed the opinion that, despite the different origins of the two products in question — namely synthetic alcohol, which is derived in particular from petroleum, and alcohol obtained by fermentation, which is produced by distilling products of the soil (cereals, wine, fruit, potatoes, beet and molasses) — the two kinds of alcohol in question are chemically identical and fully interchangeable in their uses. There is thus not only similarity between these two products but actual identity in regard to the needs which the two products are called upon to fulfil. Furthermore, the two kinds of alcohol fall within the same tariff subheading, 22.08 A, under the description denatured spirits (including ethyl alcohol and neutral spirits) of any strength. In the absence of production of synthetic alcohol in Italy, the difference in the rate of tax prescribed by Italian law for denatured synthetic alcohol on the one hand and denatured alcohol obtained by fermentation on the other has the result of preventing practically all imports of synthetic alcohol from other Member States and of directly favouring national production of alcohol by fermentation. The Commission thus considers that, being a product similar to denatured alcohol obtained by fermentation, denatured synthetic alcohol imported from other Member States should qualify for the same rate of tax as the former.

12. The Italian Government recalls that in a number of judgments the Court has recognized that the Member States may lay down differing tax arrangements, even for identical products, on the basis of objective criteria such as the conditions of production and the raw materials used (judgment of 22 June 1976 in Case 127/75 Bobie [1976] ECR 1079; judgment of 10 October 1978 in Case 148/77 Hansen [1978] ECR 1787; judgment of 8 January 1980 in Case 21/79 Commissions Italy [1980] ECR 1). According to the Court, such arrangements are compatible with the Treaty if they are laid down on the basis of objective factors and are not discriminatory or protective in their nature.

13. The arrangements challenged before the national court meet these requirements. In fact the different taxation of synthetic alcohol and of alcohol produced by fermentation in Italy is the result of an economic policy decision to favour the manufacture of alcohol from agricultural products and, correspondingly, to restrain the processing into alcohol of ethylene, a derivative of petroleum, in order to reserve that raw material for other more important economic uses. It accordingly constitutes a legitimate choice of economic policy to which effect is given by fiscal means. The implementation of that policy does not lead to any discrimination since although it results in discouraging imports of synthetic alcohol into Italy, it also has the consequence of hampering the development in Italy itself of production of alcohol from ethylene, that production being technically perfectly possible.

14. As the Court has stated on many occasions, particularly in the judgments cited by the Italian Government, in its present stage of development Community law does not restrict the freedom of each Member State to lay down tax arrangements which differentiate between certain products on the basis of objective criteria, such as the nature of the raw materials used or the production processes employed. Such differentiation is compatible with Community law if it pursues economic policy objectives which are themselves compatible with the requirements of the Treaty and its secondary law and if the detailed rules are such as to avoid any form of discrimination, direct or indirect, in regard to imports from other Member States or any form of protection of competing domestic products.

15. Differential taxation such as that which exists in Italy for denatured synthetic alcohol on the one hand and denatured alcohol obtained by fermentation on the other satisfies these requirements. It appears in fact that that system of taxation pursues an objective of legitimate industrial policy in that it is such as to promote the distillation of agricultural products as against the manufacture of alcohol from petroleum derivatives. That choice does not conflict with the rules of Community law or the requirements of a policy decided within the framework of the Community.

16. The detailed provisions of the legislation at issue before the national court cannot be considered as discriminatory since, on the one hand, it is not disputed that imports from other Member States of alcohol obtained by fermentation qualify for the same tax treatment as Italian alcohol produced by fermentation and, on the other hand, although the rate of tax prescribed for synthetic alcohol results in restraining the importation óf synthetic alcohol originating in other Member States, it has an equivalent economic effect in the national territory in that it also hampers the establishment of profitable production of the same product by Italian industry.

17. The reply to the questions submitted by the national court should therefore be that tax arrangements which impose heavier charges on denatured synthetic alcohol than on denatured alcohol obtained by fermentation on the basis of the raw materials and the manufacturing processes employed for the two products are not at variance with the first paragraph of Article 95 of the EEC Treaty if they are applied identically to the two categories of alcohol originating in other Member States.

18. Where, by reason of the taxation of synthetic alcohol, it has been impossible to develop profitable production of that type of alcohol on national territory, the application of such tax arrangements cannot be considered as constituting indirect protection of national production of alcohol obtained by fermentation within the meaning of the second paragraph of Article 95 on the sole ground that their consequence is that the product subject to the heavier taxation is in fact a product which is exclusively imported from other Member States of the Community.

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

On those grounds, THE COURT, in answer to the questions referred to it by the Pretura, Castell'Arquato, by order of 6 September 1979, hereby rules:

1 Tax arrangements which impose heavier charges on denatured synthetic alcohol than on denatured alcohol obtained by fermentation on the basis of the raw materials and the manufacturing processes employed for the two products are not at variance with the first paragraph of Article 95 of the EEC Treaty if they are applied identically to the two categories of alcohol originating in other Member States.

2 Where, by reason of the taxation of synthetic alcohol, it has been impossible to develop profitable production of that type of alcohol on national territory, the application of such tax arrangements cannot be considered as constituting indirect protection of national production of alcohol obtained by fermentation within the meaning of the second paragraph of Article 95 of the EEC Treaty on the sole ground that their consequence is that the product subject to the heavier taxation is in fact a product which is exclusively imported from other Member States of the Community.