CJEC, March 13, 1979, No 91-78

1 By an order of 22 March 1978 which was received at the Court on 12 April 1978 the Finanzgericht Hamburg referred, pursuant to article 177 of the EEC treaty, a number of questions on the interpretation of article 37 of the treaty concerning state monopolies of a commercial character in relation to articles 92 and 93 concerning the system of aids and of article 2 (1) of council decision No 70-549-EEC of 29 September 1970 on the association of the overseas countries and territories with the European Economic Community (official journal, English special edition, second series i, external relations (2), p.164) in order to establish whether the treatment in matters of taxation accorded by the federal Republic of Germany to imported spirits following the entry into force of the gesetz zur anderung des gesetzes uber das branntweinmonopol (law for the amendment of the law on the monopoly in spirits) of 2 may 1976 (bundesgesetzblatt i No 50 of 7 may 1976, p.1145) is compatible with community law.

2 The plaintiff in the main action is an undertaking which manufactures and distributes spirits and which marketed in the federal Republic of Germany at the time in question imported spirits coming from various sources, of both community and non-community origin, either unprocessed or in the form of coupages.

After the entry into force of the law of 2 may 1976 such spirits became liable to the tax on spirits of dm 1 650 per hectolitre of wine-spirit which is applicable uniformly, albeit under various designations, both to domestic spirits and to imported spirits.

3 The plaintiff, however, maintains that that equality of treatment is merely apparent, since it is clear from the preparatory stages of the law of 2 may 1976 that the increase in the rate of taxation from dm 1 500 to dm 1 650 per hectolitre had the sole objective of enabling the monopoly administration to make good its losses stemming from the marked difference which had arisen between, on the one hand, the purchase price which it is bound by law to pay to producers of spirits to which the monopoly applies and, on the other, the selling price of such spirits to consumers, as determined by market forces following the judgments of the Court of 17 february 1976 in cases 45-75 rewe ((1976) 1 ecr 181) and 91-75 miritz ((1976) 1 ecr 217).

Despite the uniform increase in the rate of taxation brought about by the law of 2 may 1976 the practical result of the system is therefore said to be that the burden of massive subsidies granted in favour of domestically-produced spirits is borne by imported spirits and that there exist the conditions under which the Court has held that an internal tax, even if in appearance it is not discriminatory, may be classified as a charge having an effect equivalent to a customs duty prohibited by the treaty, as is made clear by the judgments of the Court of 25 may 1977 in cases 77-76 cucchi ((1977) 1 ecr 987) and 105-76 interzuccheri ((1977) 1 ecr 1029.

According to the plaintiff that practice is simply the continuation of the monopoly in spirits by other means and accordingly it is appropriate to apply article 37 of the treaty, in particular paragraph (2), whereby the member states are required to refrain from introducing any new measure which is contrary to the principles laid down in paragraph (1) or which restricts the scope of the articles dealing with the abolition of customs duties and quantitative restrictions between member states.

4 The German tax administration, the defendant in the main action, claims for its part that the monopoly in spirits was adjusted in such a way that its only function at present is that of a national organization of the market and that it no longer supervises or directs the importation of spirits.

It contends that the indirect connexion existing between the levying of the charge on importation and the financing of a national economic activity does not suffice to give that charge the character of an unlawful tax or aid.

5 In order to settle the points at issue the finanzgericht submitted the following questions:

' ' 1. Is article 37 of the EEC treaty a lex specialis in relation to articles 92 and 93 of the EEC treaty in the sense that state measures which affect the movement of goods between member states and, where applicable, between member states and third countries must be judged in the light of article 37 of the EEC treaty even if the state measures contain inter alia an aid?

2.if question 1 is answered in the affirmative:

(a) is article 37 (2) in conjunction with the first subparagraph of article 37 (1) of the EEC treaty on the prohibition of discrimination between nationals of member states regarding the conditions under which goods are procured and marketed to be interpreted as also covering state measures which entail an identical increase in the tax on consumption on imported and domestic goods, the income from which is credited to the general budget and is indirectly intended to compensate for the losses of a state monopoly of a commercial character which are incurred because certain producers are paid an excessive price which does not accord with market conditions within the community and because at the same time the selling prices for the products purchased at the excessive prices have been reduced?

(b)is article 37 (2) of the EEC treaty prohibiting the introduction of measures which restrict the scope of the articles dealing with the abolition of customs duties to be interpreted as also including measures of the kind referred to in question 2 (a)?

(c)does article 37 of the EEC treaty also confer direct rights which must be protected by the national Courts upon those who are subject to an increase in the tax on consumption which affects imported and domestic goods equally if, although viewed in isolation the increase in the tax is compatible with the EEC treaty, in conjunction with other measures it is incompatible with the treaty?

(d)does the sphere of application of article 37 of the EEC treaty extend to measures which affect the importation of goods from third countries, and if so, subject to what conditions?

3.if the imposition of the tax on consumption is a charge having an effect equivalent to a customs duty and if the sphere of application of article 37 of the EEC treaty does not extend to imports from third countries: does article 2 (1) of the decision of the council of 29 September 1970 on the association of the overseas countries and territories with the European Economic Community (official journal, english special edition, second series i, external relations (2), p.164) create direct rights which must be protected by the national Courts?' '

Question 1

6 The first question asks in essence whether a state measure which is related to the operation of a state monopoly of a commercial character and affects the free movement of goods may be exempted from the prohibition on discrimination contained in article 37 of the treaty because it comprises inter alia an aid within the meaning of articles 92 and 93.

7 Both the government of the federal Republic of Germany and the Commission has called in question the applicability of article 37 in the context of the dispute brought before the finanzgericht.

According to the German government the law of 2 may 1976 was intended to adjust the German monopoly in spirits in accordance with article 37 of the treaty.

It is stated that that law in fact abolished the import monopoly existing until that time and dispensed with price-compensation so that at present the monopoly operates solely as an agency for the organization of the market, purchasing the entire domestic production at a price which covers production costs and, after processing, reselling it at prices fixed by market forces.

The Commission for its part claims that when state monopolies were adjusted in accordance with article 37 at the end of the transitional period the effectiveness of that provision of the treaty was exhausted and this field is thus governed, on the one hand, by the provisions of the treaty concerning the free movement of goods and, on the other, by article 95 concerning the application without discrimination of internal taxation.

8 Article 37 does not require the total abolition of state monopolies of a commercial character but only that they be so adjusted as to ensure that no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of member states.

It is further provided in article 37 (2) that the operations of a state monopoly shall not be employed to re-establish a customs barrier or quantitative restrictions in intra-community trade.

Article 37 remains applicable wherever, even after the adjustment prescribed in the treaty, the exercise by a state monopoly of its exclusive rights entails a discrimination or restriction prohibited by that article.

In a case such as the present, which concerns an activity specifically connected with the exercise by a state monopoly of its exclusive right to purchase, process and sell spirits, the application of the provisions of article 37 cannot be excluded.

It thus appears that the national Court was justified in requesting clarification of the relationship between article 37 and the provisions of the treaty concerning official aids since the operations of the monopoly are closely linked with the support of certain categories of producer by means of purchase prices guaranteed by law.

9 A comparison between article 37 on the one hand and articles 92 and 93 on the other shows that those provisions pursue the same objective, which is to ensure that the two categories of intervention on the part of a member state, namely action by a state monopoly and the granting of aids, do not distort the conditions of competition within the common market or create discrimination against the products or trade of other member states.

However, the application of those provisions presupposes distinct conditions peculiar to the two kinds of state measure which they are intended to govern and they differ furthermore as to their legal consequences, above all in that the intervention of the Commission plays a large part in the implementation of articles 92 and 93 whilst article 37 is intended to be directly applicable.

A measure effected through the intermediary of a public monopoly which may also be considered as an aid within the meaning of article 93 is consequently governed both by the provisions of article 37 and by those applicable to state aids.

It follows that the operations of a state monopoly are not exempted from the application of article 37 by reason of the fact that they may at the same time be classified as an aid within the meaning of the treaty.

It is therefore clear that in all cases where the arrangements for marketing a product such as spirits entail the intervention of a public monopoly acting pursuant to its exclusive right the specific provisions of article 37 are applicable, even if the relationship between the monopoly and producers may be in the nature of an aid.

10 The answer to the first question must therefore be that article 37 of the treaty constitutes in relation to articles 92 and 93 of that treaty a lex specialis in the sense that state measures, inherent in the exercise by a state monopoly of a commercial character of its exclusive right must, even where they are linked to the grant of an aid to producers subject to the monopoly, be considered in the light of the requirements of article 37.

11 In view of that answer it is unnecessary to consider the extent to which the provisions of articles 92 and 93 are applicable to the production and marketing of agricultural products, such as spirits, which are not yet subject to a common organization of the market.

Question 2

12 Question 2 (a) and (b) concerns the point whether article 37 (1) and (2) prohibits an increase in a tax on consumption where such increase, which in itself is not discriminatory, is organized in such a way that the additional revenue thereby obtained is intended to make good the losses incurred by a state monopoly as a result of the fact that it is obliged to pay producers a guaranteed purchase price in excess of the market resale price.

13 That question is in fact intended to establish whether a system of aid in conjunction with the operations of a state monopoly which together constitute a guarantee to producers of a purchase price which is higher than the selling price prevailing on the market may constitute an infringement of the provisions of article 37.

It should be noted in this context that, in a case like the present, there is no causal connexion between the amount of the aid, which is granted in the form of a purchase price guaranteed to the producer, and the selling price, since by virtue of the intervention of the monopoly the producer, who benefits from the aid, does not have access to the market, the selling price to the consumer being determined independently by the monopoly for reasons inherent in its sales policy, without reference to the destination and the amount of aid.

Accordingly, unlike articles 92 and 93 of the treaty, pursuant to which the actual economic effect of an aid granted by a state may be assessed, article 37 is intended to render the sales policy of a state monopoly subject to the requirements of the free movement of goods and of the equal opportunities which must be accorded to products imported from other member states.

Such equality of opportunity would be jeopardized if the selling price charged for domestically-produced spirits by the monopoly appeared to be lower not only than the purchase price guaranteed to the producer but also than the price, before tax, of spirits of comparable quality imported from another member state.

14 The answer to question 2 (a) and (b) must therefore be that any practice by a state monopoly which consists in marketing a product such as spirits with the aid of public funds at an abnormally low resale price compared to the price, before tax, of spirits of comparable quality imported from another member state is incompatible with article 37 (1) of the EEC treaty.

The national Court must assess the facts of the case on the basis of those criteria.

15 In accordance with the foregoing, question 2 (c) must be understood as being intended to establish whether article 37 has the effect of conferring rights directly on all persons adversely affected by the price policy which a state monopoly operates on the market under the conditions described by the national Court.

16 Article 37 is based on the principle of the prohibition of all discrimination between nationals of the member states regarding the conditions under which goods subject to a state monopoly in a member state are procured and marketed.

In a situation such as that under consideration by the finanzgericht in the present action it is possible for the national Court to draw a comparison between, on the one hand, the selling price for spirits marketed by the monopoly and, on the other, the import price of a trader importing a comparable product into the national territory.

Since any discriminatory effect in favour of domestic products at the expense of imported products may be verified with sufficient certainty there can be no doubt that, in such a case, article 37 confers upon individuals rights which the national Courts must protect.

17 The answer to question 2 (c) must therefore be that article 37 of the treaty confers rights, which the national Courts must protect, on persons who suffer the financial consequences of discrimination resulting from an abnormal reduction of the resale price charged by a public monopoly through the use of state funds.

18 Question 2 (d) asks whether the sphere of application of article 37 of the treaty extends to measures which affect the importation of goods from third countries.

19 Article 37 forms part of chapter 2 of title i of the treaty, relating to the ' ' elimination of quantitative restrictions between member states ' '.

It is clear both from the wording of that provision and from its place in the framework of the treaty that article 37 is intended to promote the free movement of goods within the community and to maintain normal conditions of competition between the economies of member states where in one or other of those states a specific product is subject to a state monopoly of a commercial character.

Accordingly the provisions of that article cannot be applied to products imported from third countries since the arrangements for the importation of such products are subject not to the provisions governing the internal market but to those relating to commercial policy.

20 The answer to question 2 (d) must therefore be that the sphere of application of article 37 of the treaty does not extend to measures which affect the importation of goods from third countries.

Question 3

21 This question is asked by the finanzgericht in order to clarify the scope of article 2 of council decision No 70-549-EEC of 29 September 1970 on the association of the overseas countries and territories with the European Economic Community, according to which products originating in the countries and territories in question must, on importation into the community, be admitted ' ' free of customs duties and charges having equivalent effect' '.

22 Decision No 70-549-EEC-assuming that it was applicable to the importations in question-is intended inter alia to extend to the countries and territories associated with the community and to the products of such countries the rules relating to the free movement of goods within the community.

In this connexion it is provided in article 2 (1) of the decision that products originating in the associated countries and territories shall, on importation into the community, be admitted free of customs duties and charges having equivalent effect.

Regard should also be had for article 5 (1) of that decision, according to which ' 'member states shall refrain from any internal fiscal measure or practice that directly or indirectly leads to discrimination between their own products and like products originating in the countries and territories' '.

Those provisions may be juxtaposed with, on the one hand, article 37 (2) of the EEC treaty and, on the other, article 95 concerning the application without discrimination of systems of internal taxation to domestic products and to imported products.

It is therefore clear that spirits originating in the countries and territories covered by decision No 70-549-EEC must receive the same treatment on importation as that which has been set out above with regard to products of community origin.

23 The answer to question 3 must therefore be that council decision No 70-549-EEC of 29 September 1970 on the association of the overseas countries and territories with the European Economic Community-subject to the reservation that its applicability to the facts of the case is verified by the national Court-is intended to place goods originating in the countries and territories concerned on an equal footing with community products so far as concerns any discriminatory practices on the part of a state monopoly of a commercial character.

Costs

24 The costs incurred by the government of the French Republic, the government of the federal Republic of Germany and the Commission of the European Communities, which have submitted observations to the Court, are not recoverable.

Since these 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 Finanzgericht Hamburg, 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 Finanzgericht Hamburg by an order of that Court of 22 March 1978, hereby rules:

1. Article 37 of the EEC treaty constitutes in relation to articles 92 and 93 if that treaty a lex specialis in the sense that state measures, inherent in the exercise by a state monopoly of a commercial character of its exclusive right must, even where they are linked to the grant of an aid to producers subject to the monopoly, be considered in the light of the requirements of article 37.

2. Any practice by a state monopoly which consists in marketing a product such as spirits with the aid of public funds at an abnormally low resale price compared to the price, before tax, of spirits of comparable quality imported from another member state is incompatible with article 37 (1) of the EEC treaty.

3. Article 37 of the EEC treaty confers rights, which the national Courts must protect, on persons who suffer the financial consequences of discrimination resulting from an abnormal reduction of the resale price charged by a public monopoly through the use of state funds.

4. The sphere of application of article 37 of the EEC treaty does not extend to measures which affect the importation of goods from third countries.