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

JUDGMENT OF THE COURT (First Chamber)

17 July 1997(1)

(Outward processing relief - Total or partial relief from import duties - Determination of value of compensating products and temporary export goods - Reasonable means of determining value)

In Case C-142/96,

REFERENCE to the Court under Article 177 of the EC Treaty by the Bundesfinanzhof for a preliminary ruling in the proceedings pending before that court between

Hauptzollamt München

and

Wacker Werke GmbH & Co. KG

on the interpretation of the second subparagraph of Article 13(2) of Council Regulation (EEC) No 2473/86 of 24 July 1986 on outward processing relief arrangements and the standard exchange system (OJ 1986 L 212, p. 1),

THE COURT (First Chamber),

composed of: L. Sevón, President of the Chamber, D.A.O. Edward (Rapporteur) and P. Jann, Judges,

Advocate General: G. Tesauro,

Registrar: R. Grass,

after considering the written observations submitted on behalf of:

• Wacker Werke GmbH & Co. KG, by Hans Maerz and Hans Werdich, auditors and tax advisers in Munich, acting as Agents,
  
  
• the Commission of the European Communities, by Fernando Castillo de la Torre, of its Legal Service, acting as Agent, and Hans-Jürgen Rabe, Rechtsanwalt, Hamburg,

having regard to the Report of the Judge-Rapporteur,

after hearing the Opinion of the Advocate General at the sitting on 24 April 1997,

gives the following

Judgment

1. By order of 7 March 1996, received at the Court on 29 April 1996, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 177 of the EC Treaty two questions on the interpretation of the second subparagraph of Article 13(2) of Council Regulation (EEC) No 2473/86 of 24 July 1986 on outward processing relief arrangements and the standard exchange system (OJ 1986 L 212, p. 1) (hereinafter 'the regulation on outward processing').
   
   
2. Those questions arose in proceedings between the Hauptzollamt (Principal Customs Office), Munich, and Wacker Werke GmbH & Co. KG (hereinafter 'Wacker Werke'), a company established in Germany, concerning an a posteriori claim for custom duties in respect of imports made by that company under the outward processing relief arrangements.
   
   
3. Article 1(2) of the regulation on outward processing allows Community goods to be temporarily exported from the customs territory of the European Community (hereinafter 'temporary export goods') in order to undergo processing, working or repair and the compensating products resulting from those operations to be released for free circulation in the customs territory of the Community with total or partial relief from import duties. According to Article 13(1) of that regulation, the relief is to be effected by deducting from the amount of import duties applicable to the compensating products released for free circulation the amount of import duties that would be applicable to the temporary export goods if they were imported into the customs territory of the Community from the country in which they underwent the processing operation or last such operation.
   
   
4. In this respect, Article 13(2) of the regulation on outward processing provides:
   
   'The amount to be deducted pursuant to paragraph 1 shall be calculated on the basis of the quantity and nature of those goods on the date of acceptance of the declaration of their being placed under outward processing relief arrangements and on the basis of the other details of taxation applicable to them on the date of acceptance of the declaration of release for free circulation of the compensating products.
   
   The value of the temporarily exported goods shall be that taken into consideration for those goods in accordance with Article 8(1)(b)(i) of Council Regulation (EEC) No 1224/80, as last amended by Regulation (EEC) No 1055/85 when determining the customs value of the compensating products or, if the value cannot be determined in this way, the difference between the customs value of the compensating products and the processing costs determined by reasonable means.'
   
   
5. Article 8(1)(b)(i) of Council Regulation (EEC) No 1224/80 of 28 May 1980 on the valuation of goods for customs purposes (OJ 1980 L 134, p. 1) provides that, in determining the customs value, there is to be added to the price actually paid or payable for the imported goods, the value, apportioned as appropriate, of the materials, components, parts and similar items incorporated in the imported goods where they are supplied directly or indirectly by the buyer free of charge or at a reduced cost for use in connection with the production and sale for export of the imported goods, to the extent that such value has not been included in the price actually paid or payable.
   
   
6. Wacker Werke exports petrol engines, subject to import duty of 5.8%, and diesel engines, subject to import duty of 6.9%, to the United States of America under the outward processing relief arrangements. It imports from the United States machinery, such as vibration plates, vibro-compacters and hydraulic pumps in which those engines are incorporated, manufactured by the Wacker Corporation, an undertaking with which Wacker Werke has financial links. The compensating products are subject to import duties of 4% and 4.1%.
   
   
7. The selling prices for the temporary export goods sold by Wacker Werke to Wacker Corporation are calculated in the case of petrol engines, which Wacker Werke manufactures itself, on the basis of manufacturing costs, plus an uplift of 25% for overheads and profits and, in the case of diesel engines which Wacker Werke purchases from other German undertakings, on the basis of the purchase price plus 5%. The compensating products are purchased from Wacker Corporation at the prices shown in the price lists of that company less a reduction of 45%.
   
   
8. In completing the customs formalities for the compensating products imported between February 1986 and December 1988, the Hauptzollamt initially used the prices that the two undertakings had invoiced to one another (the transaction value) in order to determine the customs value of the compensating products and of the temporary export goods. Subsequently, the Hauptzollamt considered that whereas the compensating products had to be assessed on the basis of their transaction value, the temporary export goods were to be assessed in accordance with Article 8(1)(b)(i) of Regulation No 1224/80 on the basis of the manufacturing cost or the purchase price paid by Wacker Werke for the engines, excluding the uplift of 25% or 5%. Accordingly it claimed a posteriori customs duties of DM 36 057.20 in respect of the imports made between February 1986 and December 1988.
   
   
9. Wacker Werke appealed against that decision to the Finanzgericht (Finance Court), Munich, which, on 20 December 1990, referred three questions to the Court for a preliminary ruling on the interpretation of the regulation on outward processing and Regulation No 1224/80.
   
   
10. In its judgment of 17 December 1992 in Wacker Werke I (Case C-16/91 [1992] ECR I-6821), the Court held that the regulation on outward processing is to be interpreted as meaning that, in calculating the total or partial relief from import duty for which it provides, the calculation of import duty on the compensating products must in principle be based on the transaction value of those products, while the value of the temporary export goods is to be calculated using one of the two methods set out in the second subparagraph of Article 13(2) of that regulation. If the value of the compensating products has been determined without any adjustment for the purposes of Article 8(1)(b)(i) of Regulation No 1224/80, the value of the temporary export goods corresponds to the difference between the customs value of the compensating products and the processing costs determined by reasonable means, such as taking account of the transaction value of the goods in question.
    
    
11. The Finanzgericht thus ruled in Wacker Werke's favour on the ground that, in that case, the reasonable means for determining the processing costs involved deducting the purchase price of the temporary export goods, including the uplift, from the transaction value of the compensating products, even if the temporary export goods are subject to a higher customs duty than the compensating products, resulting in unjustifiable customs advantages for the traders involved.
    
    
12. In its appeal against the decision of the Finanzgericht to the Bundesfinanzhof on a point of law, the Hauptzollamt claimed that the only reasonable means of calculating the value of temporary export goods is to arrive as close as possible to the purchase price or the manufacturing costs.
    
    
13. In its order for reference, the Bundesfinanzhof emphasizes that the first method set out in the second subparagraph of Article 13(2) of the regulation on outward processing does not apply to circumstances such as those of this case, since the goods supplied for processing were not supplied free of charge or at reduced prices and no corresponding value was established.
    
    
14. As for the second method set out in the second subparagraph of Article 13(2), the Bundesfinanzhof notes that the general view of commentators is that anomalies in customs rates arise when the processing arrangement takes place between connected companies, and the prices charged include elements (such as overheads, supplements for profits, rebates) which suggest that the undertakings concerned may be using outward processing for a purpose other than that for which it was intended, since the difference between the purchase price of the compensating products and the purchase price of the temporary export goods does not reflect the actual costs of processing in third countries. However, the Bundesfinanzhof states that, in the main proceedings, there is nothing to suggest that the prices charged by Wacker Werke and Wacker Corporation respectively were influenced by the business links between them.
    
    
15. As the Bundesfinanzhof itself entertained some doubts regarding the second method and, in particular, the calculation of processing costs by reasonable means, and considered that the judgment in Wacker Werke I did not sufficiently clarify that point, it stayed proceedings and referred the following questions to the Court for a preliminary ruling:
    
    '1. Is the second alternative provided for in the second subparagraph of Article 13(2) of Council Regulation (EEC) No 2473/86 of 24 July 1986 on outward processing relief arrangements ... (OJ 1986 L 212, p. 1) to be interpreted as meaning that a method of determining processing costs is reasonable only if the resulting value of the temporarily exported goods corresponds approximately to the purchase price paid by the holder of an outward processing authorization or to the production costs?
    
    2. If the answer to the first question is in the negative, in determining the processing costs can reference be made to the purchase price for the inputs inclusive of uplifts paid by the processor to the holder of an outward processing authorization, and does that apply equally where there is a tariff anomaly resulting in a higher rate of duty for the unprocessed goods than for the compensating products?'
    
    
16. It is not disputed that, in the present case, the value of the compensating products was calculated without any adjustment for the purposes of Article 8(1)(b)(i) of Regulation No 1224/80. The questions referred by the national court therefore relate only to the second method set out in the second subparagraph of Article 13(2) of the regulation on outward processing, that is to say the determination of processing costs by reasonable means. The two methods set out in that provision cannot apply simultaneously, since the second method comes into play only if it is not possible to determine the value of the temporary export goods by the first.
    
    
17. When the second method applies, the customs value of the compensating products is to be fixed by reference to the usual criterion, that is to say the transaction value. According to the wording of Article 13(2), the processing costs themselves are to be determined by 'reasonable means', which implies the use of means appropriate to the circumstances of each case.
    
    
18. In Wacker Werke I, cited above, the Court held that deduction of the transaction value of the temporary export goods from the customs value of the compensating products may constitute a reasonable means of determining the processing costs.
    
    
19. In that respect it should be noted that the customs value of the temporary export goods is to be determined as if those goods were imported into the European Community. As the Commission has rightly observed, an import is deemed to have occurred.
    
    
20. It is also important to stress that since, under Article 13(1) of the regulation on outward processing, there is to be set-off between two amounts of duty on imports - the one real, the other notional - it is only possible to calculate those duties once the relevant customs values have been determined. It follows that the calculation would be distorted were the customs values themselves to be fixed by reference to the customs duties subsequently to be imposed.
    
    
21. The possibility of tariff anomalies arising, and resulting in customs advantages for the traders concerned, is a risk inherent in the arrangements introduced by the regulation on outward processing, the primary aim of which is to prevent customs duties from being charged on goods exported from the European Community for processing in respect of which Article 1 permits total relief from import duties in certain circumstances. The customs advantages and disadvantages which may arise in individual cases must be tolerated provided there is nothing to indicate that the prices charged by the two traders respectively were influenced by the business links between them.
    
    
22. The answer to the questions submitted by the Bundesfinanzhof must therefore be that the second subparagraph of Article 13(2) of the regulation on outward processing is not to be interpreted as meaning that a method of determining processing costs may be considered reasonable only if the resulting value of the temporary export goods corresponds approximately to the purchase price paid by the person entitled to outward processing relief or to the manufacturing costs. Reference to the transaction value of the temporary export goods is a reasonable means within the meaning of that provision. Moreover, in determining the processing costs, reference may be made to the purchase price, inclusive of uplifts, of the temporary export goods even if this results in a higher rate of duty for the unprocessed goods than for the compensating products.
    
    Costs
    
    
23. The costs incurred by the Commission of the European Communities, which has submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, 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 (First Chamber),

    in answer to the questions referred to it by the Bundesfinanzhof by order of 7 March 1996, hereby rules:
    
    The second subparagraph of Article 13(2) of Council Regulation (EEC) No 2473/86 of 24 July 1986 on outward processing relief arrangements and the standard exchange system is not to be interpreted as meaning that a method of determining processing costs may be considered reasonable only if the resulting value of the temporary export goods corresponds approximately to the purchase price paid by the person entitled to outward processing relief or to the manufacturing costs. Reference to the transaction value of the temporary export goods is a reasonable means within the meaning of that provision. Moreover, in determining the processing costs, reference may be made to the purchase price, inclusive of uplifts, of the temporary export goods even if this results in a higher rate of duty for the unprocessed goods than for the compensating products.
    
    
    

Delivered in open court in Luxembourg on 17 July 1997.

R. Grass

Registrar

1: Language of the case: German.