Report for the Hearing in Case C-197/90
I — Facte and procedure
1. Relevant Community legislation
1.1. The system of financing the common agricultural policy
1. Council Regulation (EEC) No 729/70 of 21 April 1970 (Official Journal, English Special Edition 1970 I, p. 218) concerns the financing of the common agricultural policy. Article 1 provides that the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (hereafter EAGGF) is to finance refunds on exports to third countries and intervention intended to stabilize the agricultural markets. Such intervention is, according to Article 3 of the regulation, to be undertaken according to Community rules within the framework of the common organization of agricultural markets.
2. Commission Regulation (EEC) No 1723/72 of 26 July 1972 on making up accounts for the Guarantee Section of the EAGGF (Official Journal, English Spedai Edition, Second Series III, European Agricultural Guidance and Guarantee Fund, p. 109) sets out the procedure whereby annual accounts are to be forwarded to the Commission, so that it can decide to make up the accounts as provided by Article 5(2)(b) of Regulation No 729/70. Article 8(a) of Regulation No 1723/72 sutes that that decision is to cover the determination of the amount of expenditure incurred in each Member Sute during the year in question, recognized as chargeable to the EAGGF, Guarantee Section.
3. Council Directive 77/435/EEC of 27 June 1977 on scrutiny by Member Sutes of transactions forming pan of the system of financing by the Guarantee Section of the EAGGF (Official Journal 1977 L 172, p. 17) provides in Article 3 that:
1.2. Aid for the processing of skimmed-milk powder
4. Under the common organization of the market in milk and milk products, aid is granted for the use of skimmed-milk powder in feedingstuffs. Commission Regulation (EEC) No 1725/79 of 26 July 1979 on the rules for granting aid to skimmed milk processed into compound feedingstuffs and skimmed-milk powder intended for feed for calves (Official Journal 1979 L 199, p. 1) lays down the inspection procedure for that aid. According to Article 10(1) and (2)(a), (b) and (c), Member Sutes are to carry out direct inspections of undertakings, while Article 10(2Xd) and (e) provide for scrutiny of documents. The latter must be thorough and unannounced (Article 10(2)(d)).
1.3. Aid for the consumption of olive oil
5. In the oils and fats sector, there is provision for aid for the consumption of olive oil. General rules in respect of that aid are laid down in Council Regulation (EEC) No 3089/78 of 19 December 1978 (Official Journal 1978 L 369, p. 12). Under Article 7, the Member States are to institute a system of supervision to ensure that olive oil in respect of which aid has been applied for qualifies for it. Article 8 provides that the aid may be advanced as soon as the application for aid is submitted, provided that sufficient security has been provided. That system of advance aid applies in Italy. So far as concerns the security, Article 11(3) of Commission Regulation (EEC) No 2677/85 of 24 September 1985 (Official Journal 1985 L 254, p. 5) stipulates that it is to be released as soon as the competent authority of the Member Sute has recognized entitlement to the aid in respect of the quantities shown in the application. In the absence of such recognition, the security is to be forfeit in proportion to die quantities in respect of which the conditions conferring entitlement to the aid were not complied with.
1.4. The system of securities
6. Commission Regulation (EEC) No 2220/85 of 22 July 1985 (Official Journal 1985 L 205, p. 5) lays down common detailed rules tor the application of the system of securities for agricultural products. The first paragraph of Article 29 reads as follows:
2. Clearance of the accounts for 1987
2.1. Commission Decision 90/213/EEC of 19 April 1990
7. By Decision 90/213/EEC of 19 April 1990, the Commission amended Decision 89/627/EEC on the clearance of the accounts presented by the Member Sutes in respect of the expenditure of the Guarantee Section of the EAGGF (Official Journal 1989 L 359, p. 23) by refusing to allow charging to the Fund of certain expenditure by the Iulian Republic on processing aid for skimmed-milk powder and on aid for the consumption of olive oil.
8. This action seeks the annulment of Decision 90/213/EEC and more particularly its annulment in so far as concerns the refusal to allow charging to the Guarantee Section of the EAGGF of the following amounts:
2.2. Refusal to allow charging of expenditure in respect of processing aid for skimmed-milk powder
9. It is apparent from the documents before the Court that, in clearing the accounts for 1987, Commission staff carried out inspections, in particular at the premises of the three undertakings involved in the processing of skimmed-milk powder in the Province of Brescia (Frabes, Piodari and Wessanen). The Commission found that the inspections carried out by the Iulian authorities did not constitute thorough scrui'ny within the meaning of Article 10(2)(d) of Regulation No 1725/79.
10. Further scrutiny took place in October 1989. Although by letter of 20 November 1989 the Italian authorities concluded that the inspection confirmed that the three undertakings had acted quite properly, the Commission, by lener of 12 February 1990, expressed the view that further scrutiny did not amount to thorough scrutiny either. The Commission considered in particular that the reports submitted by the Italian authorities did not specify that an overall comparison had been carried out between the particular book records provided for in the legislation and the undertakings' accounts. Furthermore, those reports revealed certain deficiencies and lacunae. The Italian authorities disputed that finding in their repon of 10 March 1990.
11. In its Further Summary Report (hereafter Further Repon) of 12 March 1990, the Commission made clear its intention to reduce the expenditure relating to the three undertakings in question by a certain percentage to take account of the risk that their activities did not comply with the Community regulations because of inadequate supervision. That risk was evaluated at a flat rate of 10%. As a result, the Commission's Decision of 19 April 1990 disallowed charging to the EAGGF of 10% of the expenditure incurred on aid for the processing of skimmed-milk powder granted to the three undertakings in question.
2.3. Refusal to allow charging of expenditure in respect of aid for the consumption of olive oil
12. The Commission staff also noted delays in the inspections to determine entitlement to aid for the consumption of olive oil. Following that finding, the Commission invited Italy to carry out the necessary checks. In the light of the objective difficulties and the Italian authorities' intention to strengthen the inspection measures, the Commission disjoined the expenditure relating to the undertakings which had not been checked from the clearance of accounts for 1987. On the basis of the documents which the Iulian authorities had forwarded to it, the Commission, in its Further Report, made clear its intention not to accept an amount corresponding to the aid which was improperly granted and for which the security should have been forfeited. As a result, the abovementioned decision disallowed charging of the sums in question to the EAGGF.
II — Procedure
13. The Italian Republic's application was lodged at the Court Registry on 28 June 1990.
III — Pleas in law and arguments of the parties
1. Expenditure relating to aid for processing skimmed-milk powder intended for animal feed {paragraph 4.3.3 of the Further Report)
14. According to the Further Report, the items to be checked in the further inquiry were indicated in both the Summary Report and the Commission's letter of 2 August 1989. In addition, during an on-the-spot check, the Commission's representatives indicated those items again to the inspectors of the Italian intervention agency, the Azienda di Suto per gli Interventi nel Mercato Agricolo (herearter AIMA). In the Commission's view, the following checks in particular should have been carried out:
15. The Further Report also notes that the said reports reveal certain deficiencies and lacunae in the checks carried out, namely:
16. The Further Report leads to the conclusion that the inspection by AIMA was deficient, most importantly in that there was no overall comparison between the entries in the records provided for by the regulations and the undertaking's accounts. Furthermore, it is not apparent from the documenti forwarded that further scrutiny carried out at the three undertakings' premises attained a sufficiently high level to guarantee that all the quantities of subsidized skimmed-milk powder were incorporated. In the light of the large amount of Community aid, that weakness is such as to jeopardize the grant of part of the aid.
17. The Italian Republic pleads infringement and misapplication of Articles 8, 9 and 10 of Regulation No 1725/79 of 26 July 1979, of Articles 1, 3, 5 and 9 of Council Regulation No 729/70 of 21 April 1970, and of Article 8 of Commission Regulation No 1723/72 of 26 July 1972, and of related provisions, and also fauure to give reasons.
18. Secondly, the Italian Government claims that the EAGGFs criticisms as to the further scrutiny carried out in October 1989 are not well founded. In the Italian officers' repon of 10 March 1990, all the Commission's observations were meticulously refuted.
19. So far as concerns the applicant's first plea, the Commission sutes that the draft decision, which took no account of the Italian observations set out in the memorandum of 10 March 1990, was studied by the EAGGF committee on the following 20 March. Since the Commission considered that the observations of the Italian Government were insufficient, it did not amend the Further Report. The Commission notes that, according to the case-law of the Court, it is accepted that decisions on the clearance of accounts do not require a formal statement of reasons in so far as national administrations are closely associated with the process of drawing up the decision. Furthermore, it categorically denies that it was required to continue discussions after the period set by the Decision of 15 November 1989 on the clearance of accounts, or to respond to the memorandum of 10 March 1990. Such a claim is contrary to the procedure for clearing the accounts. Article 1(3) of Regulation No 1723/72, inserted by Commission Regulation (EEC) No 422/86 of 25 February 1986 (Official Journal 1986 L 48, p. 31), provides that the Commission may fix a deadline for Member States to forward additional information. The Commission points out that the Court, in its judgment in Joined Cases 258, 337 and 338/87 Italy v Commission [1989] ECR 3359, took account of that provision, without requiring that the forwarding of additional information should continue to be the subject of discussions. If setting a time-limit without the need for any subsequent discussions is justified under the normal clearance procedure, it is all the more so when discussions are already in progress as a result of which expenditure is being disjoined in order to enable the Member Sute to submit additional information.
2. Expenditure Telatine to aid Jot the consumption of olive ou (paragraph 4.4 of the Further Report)
20. According to the Further Report, a toul of LIT 4352012388 in respect of aid improperly granted is in the process of being recovered. The securities relating to that amount should have been forfeited and credited to the EAGGF.
21. The Italian Republic pleads infringement and misapplication of Article 8 of Council Regulation No 729/70 of 21 April 1970, and failure to state reasons in connection with Articles I, 3 and 5 of the same regulation, Article 8 of Commission Regulation No 1723/72 of 26 July 1972 and the Community provisions governing aid for the consumption of olive oil.
22. First, Italy claims that the securities could not be forfeited since it is still not possible to establish definitively whether or not the aid was in fact payable. The sums concerned represent the total amount of aid which the authorities declared unlawful. Those declarations are however disputed by the parties. It is accordingly for the Court to rule definitively on whether there was an irregularity. Consequently, charging to the EAGGF cannot be definitively disallowed.
23. The Commission contends that in circumstances such as those of this case the aid is paid out in advance and the check on whether it qualifies is carried out subsequently. Referring to Article 29 of Regulation No 2220/85, the Commission points out that, when the inspectorate finds that aid has been improperly granted, the security must be forfeited without waiting for the outcome of the legal proceedings.
1 Language of iht case: Italian.