Court of Justice of the European Communities (including Court of First Instance Decisions)

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Tax provisions - Internal taxation - Treaty provisions - Scope - Taxation apt to protect other products indirectly - Competing products - Rum and potable spirits distilled from wine and marc - Taxation system favouring domestic products to the detriment of competing imported products - Not permissible
( EEC Treaty, Art . 95 )

The purpose of Article 95, as a whole, is to ensure the free movement of goods between the Member States under normal conditions of competition, by eliminating all forms of protection which might result from the application of discriminatory internal taxation against products from other Member States, and to guarantee absolute neutrality of internal taxation as regards competition between domestic and imported products .
When applying that article, it must be considered that rum and potable spirits obtained from wine and marc, as products of distillation, are in competition with each other . Consequently, they may not be taxed in such as way as to favour national production .
It therefore constitutes a breach of its obligations under Article 95 for a Member State to tax rum originating in other Member States more heavily than other potable spirits of agricultural origin, such as those obtained from wine or marc, in so far as such differences in taxation affect the market in the products in question by reducing the consumption of imported products .

In Case 323/87
Commission of the European Communities, represented by Giuliano Marenco, Legal Adviser, acting as Agent, with an address for service in Luxembourg at the office of Georgios Kremlis, a member of the Commission' s Legal Department, Wagner Centre, Kirchberg,
applicant,
v
Italian Republic, represented by Professor L . Ferrari Bravo, Head of the Department for Contentious Diplomatic Affairs in the Ministry for Foreign Affairs, acting as Agent, assisted by Marcello Conti, Avvocato dello Stato, with an address for service in Luxembourg at the Italian Embassy, 5 Rue Marie-Adélaďde,
defendant,
APPLICATION for a declaration that by taxing alcohol distilled from sugar-cane and products containing such alcohol more heavily than other types of alcohol and other potable spirits of agricultural origin the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty,
THE COURT,
composed of : O . Due, President, R . Joliet and T . F . O' Higgins ( Presidents of Chambers ), Sir Gordon Slynn, G . F . Mancini, F . A . Schockweiler, J . C . Moitinho de Almeida, G . C . Rodríguez Iglesias and M . Zuleeg, Judges,
Advocate General : F . G . Jacobs
Registrar : J . A . Pompe, Deputy Registrar,
having regard to the Report for the Hearing and further to the hearing on 15 March 1989,
after hearing the Opinion of the Advocate General delivered at the sitting on 27 April 1989,
gives the following
Judgment

1 By an application lodged at the Court Registry on 16 October 1987, the Commission of the European Communities brought an action under Article 169 of the EEC Treaty for a declaration that by taxing alcohol distilled from sugar-cane and products containing such alcohol more heavily than other types of alcohol and other potable spirits of agricultural origin, the Italian Republic had failed to fulfil its obligations under Article 95 of the EEC Treaty .
2 It appears from the documents before the Court that, following the Court' s judgment of 15 July 1982 in Case 216/81 ( Cogis v Amministrazione delle finanze dello Stato (( 1982 )) ECR 2701 ) and its judgment of 15 March 1983 in Case 319/81 ( Commission v Italy (( 1983 )) ECR 601 ), the Italian Republic amended its tax legislation relating to spirits . By Decree-Law No 232 of 15 June 1984 ( Gazzetta Uffiziale della Repubblica Italiana No 166, 18.6.1984 ), the State tax, which was charged only on spirits other than those distilled from wine and vinous products, was abolished and the manufacturing duty on spirits produced in Italy and the corresponding frontier surcharge on imported spirits were fixed at a uniform rate of LIT 350 000 per anhydrous hectolitre of alcohol . However, when the Decree-Law was converted into a Law by Law No 408 of 28 July 1984 ( Gazzetta Uffiziale della Repubblica Italiana No 212, 2.8.1984 ), the manufacturing duty and the frontier surcharge were raised to LIT 420 000 and an exemption was introduced under which until 31 December 1988 that tax and that surcharge were fixed at LIT 340 000 per anhydrous hectolitre of alcohol for spirits distilled from wine, the by-products of wine-making, potatoes, fruit, sorghum, figs, carobs or cereals . During the course of the written procedure in this case, the Italian Republic informed the Court that the full and reduced rates of the taxation mentioned above had been raised to LIT 546 000 and 442 000 respectively per anhydrous hectolitre of alcohol and that the period of application of the reduced rate had been extended until 31 December 1992 .
3 The Commission considers, in particular, that the differential taxation provided for in Law No 408 creates categories of spirits that are artificial and biased so as to afford indirect protection for domestic products which are taxed less heavily than ethyl alcohol distilled from sugar-cane and products containing that alcohol, such as rum for instance, which, since they are not produced in Italy and cannot enjoy the tax reduction, are taxed at the full rate applicable to spirits . In reply to written questions put by the Court, the Commission explained that its action related not only to the taxation of rum but also to that of raw sugar-cane alcohol, aromatized spirits, such as gin and vodka, and liqueurs and other spirituous beverages made from alcohol distilled from sugar-cane .
4 Reference is made to the Report for the Hearing for a fuller account of the facts of the case, the course of the procedure and the submissions and arguments of the parties, which are referred to hereinafter only in so far as is necessary for the reasoning of the Court .
The taxation of rum
5 The Commission submits that rum and other potable spirits are similar products within the meaning of the first paragraph of Article 95 of the Treaty and, in the alternative, that they are in any event competing products for the purposes of the second paragraph of Article 95 .
6 The Italian Republic contends that rum cannot be regarded as a product similar to potable spirits distilled from wine or cereals in view of the respective organoleptic characteristics of those products . It acknowledges, however, that rum and other potable spirits are competing products for the purposes of the second paragraph of Article 95 .
7 The Court has consistently held that the purpose of Article 95, as a whole, is to ensure the free movement of goods between the Member States under normal conditions of competition, by eliminating all forms of protection which might result from the application of discriminatory internal taxation against products from other Member States, and to guarantee absolute neutrality of internal taxation as regards competition between domestic and imported products ( see the judgment of 9 July 1987 in Case 356/85 Commission v Belgium, (( 1987 )) ECR 3299 ).
8 As far as spirits for human consumption are concerned, it has already been made clear by the Court in its judgment of 27 February 1980 in Case 169/78 ( Commission v Italy (( 1980 )) ECR 385 ) and its judgment of 15 July 1982 in Case 216/81 ( cited above ) that spirits obtained from cereals and rum, as products of distillation, share with spirits obtained from wine and marc sufficient common characteristics to form, at least in certain circumstances, an alternative choice for consumers . That finding constitutes sufficient ground for holding that such products are in competition with each other and that they may not be taxed in such a way as to favour national production .
9 On the latter point, the Commission submits that the Italian system of taxing potable spirits is intended to offset the difference between the cost of producing spirits distilled from vinous products or fruit and the cost of producing spirits distilled from molasses . It considers that the aim of this tax distinction alone is sufficient to prove the lack of neutrality, since the economic activities connected with viticulture are infinitely more important for the Italian economy than the production of alcohol from molasses .
10 The Italian Republic claims, however, that in order to establish the existence of a breach of the second paragraph of Article 95 of the Treaty it is not sufficient merely to compare the respective tax burdens borne by the products in question but that it must be specifically proved that the disparity between those burdens is likely to have protectionist effects : the Commission has provided no such proof .
11 The Italian Republic further maintains that the taxation system in question meets the criteria which, according to the Court' s case-law, allow Member States to set up a system of differential taxation . It refers, in particular, to the Court' s judgment of 4 March 1986 in Case 243/84 ( Walker v Ministeriet for Skatter og Afgifter (( 1986 )) ECR 875 ) and states that a substantial volume of spirits is subject to the contested higher rate of tax, including spirits derived from imported sugar-cane and beet molasses .
12 It must be borne in mind that, prior to the adoption of Law No 408, the Italian tax system was characterized by the fact that the most typical domestic products, namely spirits obtained from wine and marc, were in the most favoured tax category whereas two types of product almost all of which were imported from other Member States, that is to say rum and spirits obtained from cereals, were subject to heavier taxation . In its judgment of 27 February 1980 in Case 169/78 and its judgment of 15 July 1982 in Case 216/81 ( both cited above ), the Court held that such differences in taxation affected the market in the products in question by reducing the consumption of imported products .
13 In the present case, it appears from the documents before the Court that Law No 408 has removed the differences in taxation in respect of whisky but that rum still bears a heavier burden of tax . In those circumstances, it is sufficient to refer to the Court' s findings in the abovementioned judgments, it being unnecessary to compare again the effects of the different rates on the competitive relationship between the products in question in order to establish the existence of the protective effect of the Italian taxation system in relation to rum .
14 In that context, the Italian Government cannot properly rely on the Court' s judgment in Walker v Ministeriet for Skatter og Afgifter ( cited above ). In that judgment it was held that a system of differential taxation did not favour domestic producers where a significant proportion of domestic production of alcoholic beverages fell within each of the relevant tax categories .
15 The Italian Republic avers that the category taxed at the higher rate comprises all domestically-produced spirits other than those derived from wine, fruit or cereals, including spirits produced from molasses . It must, however, be pointed out that those spirits are pure spirits which, not being intended as such for human consumption, cannot be considered to be in competition with potable spirits . The Italian Government has, therefore, failed to demonstrate that a substantial proportion of domestic production of alcoholic beverages falls within the same tax category as rum .
16 It must therefore be declared that by taxing rum originating in other Member States more heavily than other potable spirits of agricultural origin, the Italian Government has failed to fulfil its obligations under Article 95 of the Treaty .
The taxation of other alcoholic beverages
17 With regard to the taxation of alcoholic beverages other than rum which are taxed at the higher rate, the Commission has acknowledged that the import statistics in its possession do not show a distinction between, on the one hand, aromatized spirits and liqueurs produced from cane-sugar alcohol and, on the other, those produced from other spirits of agricultural origin .
18 With regard to imports of raw sugar-cane alcohol, the Commission stated that the same figures encompassed alcohol of industrial origin ( synthetic alcohol ) and alcohol of agricultural origin without making any distinction according to the basic agricultural product used . Beyond a certain alcoholic strength and degree of purity, it was impossible to identify the exact origin of the alcohol .
19 The Court has consistently held ( see, most recently, the judgment of 25 April 1989 in Case 141/87 Commission v Italy (( 1989 )) ECR 943, and the judgment of 30 May 1989 in Case 340/87 Commission v Italy (( 1989 )) ECR 1483 ) that in proceedings brought under Article 169 of the Treaty to establish a Member State' s breach of obligations it is for the Commission to establish the existence of the alleged breach .
20 In the present case, the Commission has not established whether, and if so to what extent, imported products were produced from alcohol derived from sugar-cane and were thus taxed at the higher rate . In the absence of such evidence, the Court is unable to reach a conclusion either on the competitive relationship between domestic and imported products or on the protective nature of the taxation system at issue . In those circumstances, the application must be dismissed in so far as it relates to the taxation of alcoholic beverages other than rum .

Costs
21 Under Article 69 ( 2 ) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs . However, the first subparagraph of Article 69 ( 3 ) provides that the Court may order the parties to bear their own costs in whole or in part if each party succeeds on some and fails on other heads .
22 Since the Commission has failed on some heads, each party must be ordered to pay its own costs .

On those grounds,
THE COURT,
hereby :
( 1 ) Declares that by taxing rum originating in other Member States more heavily than other potable spirits of agricultural origin, the Italian Government has failed to fulfil its obligations under Article 95 of the Treaty .
( 2 ) Dismisses the remainder of the application .
( 3 ) Orders the parties to bear their own costs .