Opinion of the Advocate-General
1 Does the supply of counterfeit perfume products constitute a taxable transaction for VAT purposes? By this question, the Court of Appeal (Criminal Division), London, asks the Court to clarify its case-law under which certain unlawful transactions are held to fall outside the scope of the Sixth Directive. (1)
Facts
2 Mr Goodwin and Mr Unstead were both convicted of the offence of being knowingly concerned in the taking of steps with a view to the fraudulent evasion of VAT, contrary to Section 72(1) of the Value Added Tax Act 1994. Mr Goodwin was accused of having purchased counterfeit perfume products and of having sold them when he was not registered for VAT, ensuring thereby that he did not have to pay any VAT. Mr Unstead was accused of having participated in the manufacture, production, distribution and sale of such products through a business organisation which he ran together with other persons, and which was not registered for VAT and therefore did not pay VAT.
3 Mr Goodwin and Mr Unstead appealed against their convictions to the Court of Appeal. Without denying that they had carried out the transactions as charged, they submitted that, on a proper construction of the Sixth Directive, supplies of counterfeit perfume products are not subject to VAT.
4 While agreeing with the Inner Crown Court that, on the facts, VAT was payable, the Court of Appeal considered that it would be helpful to obtain a preliminary ruling on this point. It therefore referred the following question to the Court of Justice:
`Does the supply of counterfeit perfume products fall within the scope of Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes (the Sixth Directive)?'
Relevant legislation and case-law
5 The scope of the Sixth Directive is delimited by Article 2 thereof, which provides:
`The following shall be subject to value added tax:
1. The supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
2. The importation of goods.'
6 In keeping with the general terms in which that provision is framed, the Court considers the nature of transactions to be irrelevant for the purposes of VAT liability, since `the principle of fiscal neutrality [precludes], as far as the levying of value added tax is concerned, a generalised differentiation between lawful and unlawful transactions'. (2)
7 However, the Court has recognised certain exceptions to that principle.
8 By transposing its case-law on customs duties (3) to cases concerning the levying of VAT on unlawful imports and supplies, the Court has on a number of occasions taken the view that certain products `which have special characteristics inasmuch as, because of their very nature, they are subject to a total prohibition on their being put into circulation in all the Member States, with the exception of strictly controlled economic channels for use for medical and scientific purposes', (4) or, inasmuch as they `... may not be marketed or incorporated into economic channels', (5) are `wholly alien to the provisions of the Sixth Directive on the definition of the basis of assessment and, in consequence, to the provisions on the origination of a turnover tax debt'. (6)
9 Two kinds of product have already been recognised as possessing such special characteristics. The first is narcotics, such as amphetamines or hashish, whose supply or importation independently of an economic channel strictly controlled by the competent authorities for use for medical and scientific purposes `... can give rise only to penalties under the criminal law'. (7) Similarly, and `a fortiori', VAT is not payable on imports of counterfeit currency, there being no circumstances in which such imports could be authorised. (8)
10 In the case of unlawful goods of that kind, an exception to the principle of fiscal neutrality is justified, since `... because of [their] special characteristics ..., all competition between a lawful economic sector and an unlawful sector is precluded'. (9)
11 On the other hand, when that case-law was relied on in respect of computer systems, `where there is no absolute prohibition based on the nature of the goods or their special characteristics', the Court held that the mere fact that export of those goods to certain destinations was prohibited, because of their potential use for strategic purposes, `[could] not be sufficient to remove those products from the scope of the Sixth Directive'. (10)
12 Finally, I would refer to Case C-283/95 Fischer, currently pending before the Court, in which Advocate General Jacobs proposes in paragraph 20 of his Opinion that the Court should conclude that `unlawful roulette transactions such as those in issue fall within the scope of VAT [and] are therefore taxable under Article 2(1) of the Directive ...'.
The reply to the question
13 Both the Court of Appeal and all parties to the proceedings take as their point of departure the case-law cited above. The various observations submitted diverge, however, on the question of its application. Whereas the appellants infer from that case-law that the Sixth Directive does not apply to their situation, the Commission and the Greek and United Kingdom Governments maintain the contrary.
14 I agree with the latter view, since to my mind the Court's case-law concerning narcotics and counterfeit currency cannot be transposed to counterfeit products such as the perfumes at issue.
15 First of all, I would emphasise the fundamental importance of the principle of fiscal neutrality which underlies the Sixth Directive, by virtue of which VAT is payable without exception on all supplies of goods and services effected for consideration within the territory of a Member State by a taxable person, likewise on all imports of goods. For VAT purposes, therefore, unlawful trade and lawful trade must be treated in the same way, so that unlawful traders will not be given an advantage over their law-abiding competitors.
16 In the present case, in conformity with the principle of fiscal neutrality, and thus notwithstanding the reprehensible nature of the counterfeiting involved, the products in question ought to rank among those in whose case transactions involving them give rise to the payment of VAT. The information before the Court does not disclose whether the counterfeit perfumes marketed by the appellants are manufactured within the Community or imported from a non-member country. In either case, however, the transactions in question - whether involving a `supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such' or an `importation of goods' - rank among those specified in Article 2(1) or (2) of the Sixth Directive.
17 As the Greek and United Kingdom Governments emphasise, according to established case-law, all exceptions to that principle must be narrowly construed and confined exclusively to marginal cases where the nature of the products concerned precludes any possibility of competition between a lawful sector and an unlawful sector. According to the test adopted by the Court, the goods in question must be `goods which, by reason of their special characteristics, may not be marketed or incorporated into economic channels'.
18 The argument put forward by the appellants, whereby they seek to have the transactions at issue brought within that exceptional category, on the ground that they undermine the functioning of the common market and can therefore only be `alien' to the Sixth Directive, first of all creates a sense of unease which is hard to dispel. In flagrant disregard of the principle `nemo auditur turpitudinem propriam allegans', the appellants are seeking to rely on the unhealthy, and even dangerous, nature, from an economic point of view, of their activities, in order to prove that they are not liable to pay VAT.
19 More importantly, however, their argument fails if the tests already adopted in the case-law are applied to it in the circumstances of this case.
20 In the first place, unlike narcotics or counterfeit currency, counterfeit products are not goods whose marketing is prohibited because of their very nature, or their special characteristics.
21 The transactions to which narcotics or counterfeit currency may give rise are intrinsically illegal, because such products are systematically banned in all the Member States by reason of their special characteristics, namely their disastrous effects, in the case of narcotics, on the human body and, in the case of counterfeit currency, on the economy of a country. Their prohibition is designed to protect what may be termed the general interest. Moreover, the Court has emphasised the fact that these two types of product are universally regarded as of a reprehensible nature by referring to the international conventions for their suppression. (11)
22 Counterfeit products such as the perfumes at issue are not, as such, banned in the Community by reason of their intrinsic nature. Obviously there is a lawful trade in perfumes, as indeed in any product which can be counterfeited. While the marketing of counterfeit products may be banned, the object of this is not the direct protection of a general interest; rather, the aim is either to prevent consumers from being cheated as a result of purchasing goods other than those covered by the guarantees attaching to the mark that is infringed, or, above all, to protect the individual interests of the holder of a right. Although transactions involving such products infringe rules such as those governing intellectual property, the ensuing prohibition is not linked to the nature or essential characteristics of the products.
23 Counterfeiting is admittedly a plague which causes serious damage to lawful commercial activities, (12) and against which the Community has sought to guard itself, in the specific field of goods coming from or destined for non-Member countries, through the adoption of two successive regulations. (13) Even today, however, a finding that counterfeiting is illegal can only come about at Community level if the holder of the flouted right takes action.
24 The Community procedure which has been established opens as a rule with the lodging of an application by the holder of the right which has been infringed. (14) Regulation No 3295/94 also provides for the customs authorities to initiate a proceeding of their own motion by notifying the holder of a right of a suspected risk of infringement and withholding the goods to enable him to lodge an application for suspension of release. (15) The fact remains that, even in such cases, continued suspension of release depends on the holder of the right having applied to the competent authority for a decision on the merits.
25 Similarly, in cases involving not imported products, but goods manufactured in the Community (the position in the present case cannot be determined from the order for reference), the sale of those goods must be presumed to be lawful unless and until the owner of the trade mark or a related right shows that his exclusive rights have been infringed. (16)
26 Thus, counterfeit goods, such as the perfumes at issue, are not unlawful at Community level by reason of their inherent characteristics. They can only be prohibited if it is proved that they infringe a valid property right. As the Commission has pointed out, (17) the marketing of such products could at most be subject to a conditional prohibition but not, as in the case of narcotics or counterfeit currency, wholly banned. By contrast with those cases, the circumstances here are similar to those in Lange, cited above, where the goods were not prohibited by reason of their very nature, and their exportation was banned only in respect of certain countries where they could be used for strategic purposes. This is also the line of reasoning which Advocate General Jacobs, in his Opinion in Fischer, mentioned above, proposes that the Court should follow with regard to the unlawful organisation of roulette games.
27 Since counterfeit products cannot, by reason of special characteristics, be ranked among `goods which may not be marketed or incorporated into economic channels', the possibility of competition with goods which are traded lawfully can by no means be ruled out.
28 As the United Kingdom Government and the Commission rightly point out, unlike counterfeit currency or narcotics (in respect of which either there is no lawful market or there is trading, but subject to such strict controls that it can never compete with lawful trade), there is obviously a lawful market in perfume products which forms an integral part of the Community economy. However, even though trade in counterfeit products is prohibited - because of the harm it causes to the lawful business activities which are liable to be supplanted by it, and in order to protect consumers (18) - and however much its existence may be deplored, the fact that it still goes on cannot be denied. Refusal to take account of this (particularly from the tax aspect, which is the one in point here) on the ground that, if such goods are banned, they are extra commercium and cannot therefore be subject to VAT, would confer on unlawful traders an unfair competitive advantage over their legitimate rivals who, alone, would have to pay VAT.
29 Moreover, the present case clearly illustrates the dangers of widening the Court's case-law concerning exceptions to the principle of fiscal neutrality. It may very well be that the appellants calculated that, notwithstanding the risk of prosecution entailed, trading in counterfeit perfume products would nevertheless be worthwhile on the basis that VAT did not apply to those products. By the same token, there can be no question of encouraging transactions of that type by guaranteeing them the benefit of an unjustified tax exemption.
30 Furthermore, as the United Kingdom Government and the Commission emphasise, (19) if levying of VAT were to depend on whether or not a product is counterfeit, the whole integrity of the internal market would be undermined. Given the lack of harmonisation in this field, the catalogue of counterfeit goods varies from one Member State to another. Consequently, if the same tax treatment is to be accorded to all transactions within the Community, the question whether VAT is payable on goods must be kept entirely separate from the question whether or not those goods are counterfeit.
31 One last point. In all the cases cited above, the Court has taken care to make it clear that the question whether a transaction is subject to VAT is independent of the operation of other rules of domestic law, particularly in the field of criminal law. In the present case, it is clear that this continues to hold true and that the Court's judgment will be wholly without prejudice to `... the powers of Member States to impose appropriate penalties, including those with financial consequences, for contraventions of their legislation ...'. (20)
32 Accordingly, I conclude that transactions involving counterfeit products, such as the perfume products at issue, fall within the scope of VAT. They are therefore subject to taxation under Article 2 of the Sixth Directive.
Conclusion
33 In view of the foregoing considerations, I propose that the Court reply as follows to the question referred by the Court of Appeal (Criminal Division), London:
Article 2 of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment must be interpreted as making the supply of counterfeit products, such as perfumes, subject to VAT.
(1) - Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1).
(2) - Case 269/86 Mol [1988] ECR 3627, paragraph 18, Case 289/86 Happy Family [1988] ECR 3655, paragraph 20, and Case C-111/92 Lange [1993] ECR I-4677, paragraph 16.
(3) - In Case 50/80 Horvath [1981] ECR 385, Case 221/81 Wolf [1982] ECR 3681 and Case 240/81 Einberger [1982] ECR 3699 (hereinafter `Einberger I'), the Court took the view that no customs debt arises upon the importation of drugs such as morphine, heroin and cocaine, which do not pass along the economic channels strictly controlled by the competent authorities for use for medical and scientific purposes.
(4) - Mol, paragraph 18, and Happy Family, paragraph 20.
(5) - Lange, paragraph 12.
(6) - Happy Family, paragraph 17, Mol, paragraph 15, and Case C-343/89 Witzemann [1990] ECR I-4477, paragraph 19. See also Case 294/82 Einberger [1984] ECR 1177 (`Einberger II'), paragraph 20, and Lange, paragraph 12.
(7) - Mol, paragraph 15, and Happy Family, paragraph 18.
(8) - Witzemann, paragraph 20.
(9) - Lange, paragraph 16. See also Mol, paragraph 18, and Happy Family, paragraph 20.
(10) - Lange, paragraph 17.
(11) - The relevant conventions are the Single Convention on Narcotic Drugs 1961 (Happy Family, paragraph 25), the Convention on Psychotropic Substances 1971 (Mol, paragraph 24) and the International Convention for the Suppression of Counterfeiting Currency (Witzemann, paragraph 14).
(12) - For comment, supported by statistics, see A.-S. Gourdin-Lamblin, `La lutte contre la contrefaçon en droit communautaire', Revue du marché commun et de l'Union européenne, No 394, January 1996.
(13) - Council Regulation (EEC) No 3842/86 of 1 December 1986 laying down measures to prohibit the release for free circulation of counterfeit goods (OJ 1986 L 357, p. 1), replaced and amended by Council Regulation (EC) No 3295/94 of 22 December 1994 laying down measures to prohibit the release for free circulation, export, re-export or entry for a suspensive procedure of counterfeit and pirated goods (OJ 1994 L 341, p. 8).
(14) - Article 3 of Regulation No 3295/94.
(15) - Article 4 of Regulation No 3295/94.
(16) - In such cases the rules governing trade marks would apply, and in particular Article 5 of First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trade marks (OJ 1989 L 40, p. 1), which provides that the owner of a trade mark is entitled to prevent all third parties from using his trade mark or any sign where, because of its similarity to that trade mark, there exists a likelihood of confusion.
(17) - Point 29 of its observations.
(18) - See, to that effect, the second recital in the preamble to Regulation No 3295/94.
(19) - See also paragraph 26 of Advocate General Jacobs' Opinion in Fischer.
(20) - See, most recently, Lange, paragraph 24.
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