CJEC, February 27, 1980, No 68-79

1 By order of 26 March 1979 which was received at the Court on 26 April 1979, the Oestre landsret, Copenhagen, referred to the Court for a preliminary ruling under article 177 of the EEC treaty questions concerning the interpretation of article 95 of the EEC treaty, in order, first, to determine the compatibility with that provision of the tax difference created by the Danish consolidated law No 151 of 4 April 1978 on excise duty on spirits and, secondly, in order to decide to what extent a tax-payer liable to pay charges levied contrary to community law may claim the right to repayment of the charges levied.

2 According to article 2 of consolidated law No 151 to which the Court making the reference alludes excise duty has been fixed as follows:

(1) in respect of aquavit and schnapps (products hereinafter referred to merely as ''aquavit '', owing to the similarity of the two words), at dkr 167.50 per litre of pure ethyl alcohol, and

(2) in respect of ''other products ''at dkr 257.15 per litre of pure ethyl alcohol.

3 according to article 3 of the same law the products to which the rate of duty laid down under subparagraph (1) of article 2 applies are defined as those ''manufactured from neutral alcohol with the addition of vegetable aromatic material ''and, in addition, as ''not resembling gin, vodka, Geneva, wacholder or other similar products, nor having the same characteristics as liqueurs, punch, bitters or aniseed spirit, rum, spirits distilled from fruit and other spirits whose typical flavour is obtained by distillation or maturation ''.

4 According to the order making the reference, Hans just i-s, the plaintiff in the main action, imports wine and spirits and also produces alcoholic beverages. It markets only negligible amounts of products taxed as aquavit but sells on the other hand large quantities of other spirits. In its monthly return for June 1978, sent to the customs authorities, the applicant declared a consignment of imported alcoholic beverages with a view to the application of excise duty. A small proportion of that quantity was made up by aquavit, which is taxed at dkr 167.50 per litre of pure ethyl alcohol, the larger part consisting of spirits other than aquavit, taxed at the rate of dkr 257.15 per litre of pure ethyl alcohol.

5 When Hans just i-s submitted its tax return to the authorities it claimed that the duty levied on spirits other than aquavit could only be levied according to the rate applicable to the latter. The customs authorities informed the plaintiff that if the duty was not paid in full in accordance with the law, the duty payable would be collected by distress and the undertaking would be liable to be struck off the customs register. The plaintiff therefore paid the duty in full but under protest, and reserved the right to claim repayment of the difference between the two rates of tax. Subsequently it brought the action which is pending at this moment before the Oestre landsret, claiming that the tax on imported spirits other than aquavit at a higher rate than that applied to the latter is contrary to the provisions of article 95 of the treaty. It therefore claimed repayment of the sums which it considers it was liable to pay contrary to the provisions of community law.

6 Bearing in mind that the commission has brought against the kingdom of Denmark an action, case 171-78, for failure to fulfil its obligations under the EEC treaty questioning the compatibility of the legislation in question with the treaty, the national Court decided to stay the proceedings and to refer to the Court of justice for a preliminary ruling a series of questions, the first three of which concern the compatibility with article 95 of the tax system which forms the subject-matter of the dispute, whilst the fourth question relates to the possibility of repayment of the charges levied.

Compatibility with article 95 of the disputed tax system (questions 1, 2 and 3)

7 The first three questions are worded as follows:

Question 1a

Is it contrary to community law that a national system of taxation should apply different rates of tax to ''aquavit and schnapps ''on the one hand and ''other spirits ''on the other, bearing in mind that:

(a) under national legislation the two categories are distinguished through a definition based on content in raw materials and extracts, and on strength and characteristics of taste ;

(b) the distinction is not based on whether the relevant goods constitute imported or domestic products and within the two categories of tax no distinction is drawn on the basis of the origin of the products?

Question 1b

Is it relevant to the answer to question 1a to establish that, in proportion to the cost price, the tax burdens the lower-taxed class of spirits (''aquavit and schnapps '') to the same degree as the highly-taxed class of spirits (''other spirits '') ?

Question 2

If it is lawful to have different rates of tax, as mentioned in question 1, does community law establish requirements for the application of such rates to imported products?

(a) must imported spirits be taxed at the same rate as identical domestic products or those bearing the greatest similarity to such imported products?

(b) must all imported spirits be taxed at the lower national rate although ''other spirits ''of home origin are taxed at the higher rate?

Question 3

A. If it is unlawful to have different rates, on what criteria shall it be established which rate is applicable?

B. May article 95 be relied upon by Danish producers or only by importers?

8 The provisions contained in the law the application of which forms the basis of the action brought before the Oestre landsret gave rise to an action for failure on the part of a member state to fulfil its obligations under the EEC treaty which has been brought by the commission under article 169 of the EEC treaty and which forms the subject-matter of case 171-78. The points of law examined in the context of that action are identical in substance to those which have been raised by the first three questions from the Oestre landsret.

9 In a judgment delivered today the Court acknowledged that by applying discriminatory taxation on spirits such as that laid down by the law in dispute the kingdom of Denmark has failed to fulfil its obligations under article 95 of the EEC treaty as regards products imported from other member states. It is therefore sufficient to refer to that extent to the judgment in case 171-78, the text of which is annexed to this judgment. In view of the reasons set out in that judgment the reply to the questions which have been referred to this Court by the national Court should be as follows:

10 The first question, referring to various features of Danish tax legislation, seeks a reply from the Court to the question whether such a tax system is compatible with the requirements of community law. In its judgment in case 171-78 the Court examined the characteristics of that system and came to the conclusion that it discriminates against an indeterminate number of products which have been imported or which might be imported into Denmark and that, moreover, it is of such a nature as to afford protection to domestic production of aquavit.

11 However, the Court did not exclude the possibility, in principle, that national tax legislation might draw a distinction between various alcoholic beverages, it being understood, however, that such a distinction may not be used for the purposes of tax discrimination or in such a manner as to afford protection to domestic products. The Court found that the distinction made in the Danish legislation between aquavit and all other alcoholic beverages was discriminatory and protective in nature.

12 The reply to the first question should therefore be that whilst the treaty does not exclude, in principle a difference in the taxation of various alcoholic products, such a distinction may not be used for the purposes of tax discrimination or in such a manner as to afford protection, even indirect, to domestic production. A tax system which consists in conferring a tax advantage on a single product which represents the major proportion of domestic production to the exclusion of all other similar or competing imported products is incompatible with community law.

13 The second and third questions are alternatives. Bearing in mind the reply which has been given to the first question, only the third requires an opinion. The question is in two parts.

14 The first part asks what rate should be applied to imported products where a system of taxation at different rates has been found to be incompatible with community law. Since community law, as it stands at present, does not restrict the freedom of member states regarding the fixing of rates of tax in this respect, it follows from article 95 that the rate to be applied to imported products must be fixed in such a manner as to abolish the margin of discrimination or protection which is prohibited by the treaty.

15 The second part of the third question asks whether article 95 may be relied upon only by importers or whether Danish producers may likewise avail themselves of that provision. The reason for this question is that a certain proportion of domestic production of spirits is subject to the highest rate of tax, as was stated in the decision in the judgment in case 171-78. As article 95 refers expressly to ''products of other member states '', the provision cannot be relied on by domestic producers of the member state in question.

16 The reply to the third question is therefore that where a national system of taxation at different rates is found to be incompatible with community law, the member state in question must apply to imported products a rate of tax which eliminates the margin of discrimination or protection prohibited by the treaty. Article 95 accords such treatment only to products which are imported from other member states.

Repayment of taxes which have been levied contrary to community law (question 4)

17 The fourth question referred to the Court by the Oestre landsret is worded as follows:

If the matter is relevant, does community law contain any rules of significance for deciding the question of the repayment of taxes, payment of which was contrary to article 95? In this connexion is it of any relevance that a trader can establish that he has suffered loss?

18 The plaintiff in the main action states in this respect that for a long period, assuming that the Danish legislation was in conformity with community law, it paid duty on the imported spirits in good faith and in complete confidence. From 1978, when it became aware that the Danish legislation might be contrary to community law, it raised objections. However, subject to threats of distraint and removal of its name from the register of the directorate general for customs, it was obliged to pay the duty claimed in order to be able subsequently to claim a refund of it by legal action. The undertaking acknowledges that the claim for recovery of sums paid but not owed must be decided in accordance with national law, but recalls that according to the case-law of the Court (the judgments in the rewe and comet cases of 16 December 1976) such provisions must not be applied in such a manner as to make it impossible in practice to exercise the rights which the national Courts are obliged to protect.

19 The plaintiff asserts that member states have a duty to provide the legal protection which individuals derive from the direct effect of the provisions of community law. The most appropriate solution would be to confer, in a case such as the present one, a simple right to recover the sums paid but not owed. However, the rules of Danish law concerning the recovery of charges unlawfully levied are somewhat obscure. As the law stands at present it is to be expected that a Danish Court will not allow a claim for recovery of such sums whenever it reaches the finding that a tax or other charge which has been wrongfully levied may be presumed to have been passed on to the consumer. As to the question whether a person wrongfully obliged to pay a charge may be required to show damage, the plaintiff points out that the bigger the difference in price between the two categories of products, the more difficult it is to sell the expensive product. In any case, the effect of the increase in the rates of duty on spirits on 7 September 1977 by law No 437 of 6 September 1977 was to reduce sales of spirits other than aquavit: not only did this drop in sales entail a serious reduction in the undertaking's profits but it also compelled it to reduce its staff. A similar fall in sales of spirits other than aquavit affected the entire industry in Denmark.

20 The Danish government acknowledges that the protection afforded by the direct effect of community law implies, in principle, that tax-payers are entitled to claim a refund of charges which have been levied in breach of community law. In its opinion, the sums should be refunded in accordance with the rules of national law, it being understood, however, that the latter may not counteract the direct effect of community law and that the procedure laid down by those rules must not be less favourable than similar ones governing domestic actions. Under Danish law the criterion of unjust enrichment forms the cornerstone of the rules relating to the refunding of taxes paid in error and paid but not owed. From that point of view, the Danish government observes that the plaintiff in the main action sold its products after paying the taxes, at the normal prices, so that the undertaking has covered, besides the cost price, the amount of the disputed charges with the addition of a normal profit margin. Thus the charges have in fact been paid by the consumer and therefore the plaintiff has suffered no damage. Refunding the charges would therefore amount to an unjust enrichment of the undertaking. If the duty were refunded to the undertaking which in fact merely served as a collection body for the charge, the member state might subsequently force complaints from those who have ultimately borne the burden of the tax, thus having to repay the same amount twice.

21 The Danish government also emphasizes the financial consequences for the Danish state of an obligation simply to refund the charges which have been levied to the extent to which they are found to be contrary to community law. The difference in taxation between imported spirits and aquavit accounts for annual revenue of approximately 200 million kroner; since the limitation period applicable to claims for refunds is five years, the Danish state could find itself faced with claims for refunds amounting to approximately 1 thousand million kroner.

22 A comparison of the national systems shows that the problem of disputing charges which have been unlawfully claimed or the refunding of charges paid but not owed is settled in the various member states, and even within a single member state, in different ways, according to the various kinds of taxes or charges in question. In certain cases objections or claims of this type are subject to specific procedural conditions and time-limits under the law with regard both to complaints submitted to the tax authorities and to legal proceedings. It was with a view to the operation of such remedies that, in its jugdments in the rewe and comet cases of 16 December 1976 (case 33 and case 45-76, (1976) ecr 1989 and 2043 respectively) the Court held that it was compatible with community law to lay down reasonable limitation periods in the interests of legal certainty which protects both the tax-payer and the administration concerned.

23 In other cases claims for repayment of charges which were paid but not owed must be brought before the ordinary Courts, mainly in the form of claims for the refunding of sums paid but not owed. Such actions are available for varying lengths of time, in some cases for the limitation period laid down under the general law, with the result that member states involved may be faced with a heavy accumulation of claims when certain national tax provisions have been found to be incompatible with the requirements of community law.

24 The system applied in this connexion in the kingdom of Denmark belongs to the latter group for, in that country, refunding of charges paid but not owed is sought in the ordinary Courts by means of an action for recovery of the sums paid but not owed subject to a limitation period which is, in principle, five years. According to Danish law the Courts take into account in such cases the fact that the charges which were paid but not owed were incorporated in the price of the goods and passed on to subsequent stages in the economic chain; it also appears that those Courts may take into consideration in deciding the amounts to be refunded any damage which may have been suffered by a tax-payer as a result of the incidence of unlawful taxation on his turnover.

25 It follows from the judgments of 16 December 1976, in the rewe and comet cases, supra, that, applying the principle of co-operation laid down in article 5 of the treaty, it is the Courts of the member states which are entrusted with ensuring the legal protection which subjects derive from the direct effect of the provisions of community law. In the absence of community rules concerning the refunding of national charges which have been unlawfully levied, it is for the domestic legal system of each member state to designate the Courts having jurisdiction and to determine the procedural conditions governing actions at law intended to ensure the protection of the rights which subjects derive from the direct effect of community law, it being understood that such conditions cannot be less favourable than those relating to similar actions of a domestic nature and that under no circumstances may they be so adapted as to make it impossible in practice to exercise the rights which the national Courts are bound to protect.

26 It should be specified in this connexion that the protection of rights guaranteed in the matter by community law does not require an order for the recovery of charges improperly made to be granted in conditions which would involve the unjust enrichment of those entitled. There is nothing therefore, from the point of view of community law, to prevent national Courts from taking account in accordance with their national law of the fact that it has been possible for charges unduly levied to be incorporated in the prices of the undertaking liable for the charge and to be passed on to the purchasers. It is equally compatible with the principles of community law for Courts before which claims for recovery of repayments are brought to take into consideration, in accordance with their national law, the damage which an importer may have suffered because the effect of the discriminatory or protective tax provisions was to restrict the volume of imports from other member states.

27 The reply to the fourth question should therefore be that it is for the member states to ensure the repayment of charges levied contrary to article 95 in accordance with the provisions of their internal law subject to conditions which must not be less favourable than those relating to similar actions of a domestic nature and which in any case must not make it impossible in practice to exercise the rights conferred by the community legal system: community law does not prevent the fact that the burden of the charges which have been unlawfully levied may have been passed on to other traders or to consumers from being taken into consideration ; lastly, it is compatible with the principles of community law to take into consideration, if appropriate, in accordance with the national law of the member state concerned, the damage suffered by the person liable to pay the charges, by reason of the restrictive effect of the latter on the volume of imports from other member states.

Costs

The costs incurred by the government of the kingdom of Denmark and by the commission of the European Communities, which have submitted observations to the Court, are not recoverable.

As 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 Oestre landsret, 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 Oestre landsret by order of 26 March 1979, hereby rules:

1. Whilst the treaty does not exclude, in principle a difference in the taxation of various alcoholic products, such a distinction may not be used for the purposes of tax discrimination or in such a manner as to afford protection, even indirect, to domestic production. A system which consists in conferring a tax advantage on a single product which represents the major proportion of domestic production to the exclusion of all other similar or competing imported products is incompatible with community law.

2. Where a national system of taxation at different rates is found to be incompatible with community law, the member state in question must apply to imported products a rate of tax which eliminates the margin of discrimination or protection prohibited by the treaty. Article 95 accords such treatment only to products which are imported from other member states.