OPINION OF MR ADVOCATE GENERAL
VERLOREN VAN THEMAAT
delivered on 3 December 1985 ( *1 )
Mr President,
Members of the Court,
1. Introduction
1.1. Subject-matter
The two cases which I am to deal with today, Cases 106 and 243/84, again raise the question of the conditions in which alcoholic beverages are to be regarded as similar within the meaning of the first paragraph of Article 95 and of the conditions in which they are to be regarded as being merely in indirect competition with one another for the purposes of the second paragraph of that article.
In its direct action in Case 106/84 the Commission refers to certain decisions of the Court concerning alcoholic beverages, from which it draws the conclusion — which those Members of the Court who are wine connoisseurs may find somewhat surprising — that Danish fruit wine is to be regarded as similar to table wine made from grapes. However, the action is also concerned with liqueur wine, whether made from grapes or other fruit. It must be inferred from the Commission's arguments that its position is also based on its own proposals for harmonizing excise duties charged on alcoholic beverages. Those proposals also play a part in the Commission's discussions with the Danish Government concerning the date on which these proceedings were instituted, that is to say a number of years after the Danish legislation now under challenge was notified to the Commission. Finally, another question which is relevant to this case is whether the Danish Government was right to rely in its defence upon the judgments of the Court in Case 140/79 (Chemial Farmaceutici [1981] ECR 1) and Case 46/80 (Vīna/[1981] ECR 77).
In Case 243/84, which is a reference for a preliminary ruling, it seems at first sight to follow automatically from the judgment of the Court in Case 171/78 (Commission v Denmark [1980] ECR 447) that whisky must be regarded as similar to other distilled beverages (aquavit in that case). The taxation of whisky at a higher rate than aquavit was, according to the Court's survey of the facts in that case, the main, though not the only ground for the initiation of proceedings. Accordingly, whisky cannot at the same time be regarded as similar to liqueur wine, as John Walker maintains in this case. It is clear from paragraph 12 of the judgment in Case 171/78, however, that the Court left unresolved the question whether whisky should be classified in the category of liqueur wine or in that of spirits. In that paragraph, the Court states on the one hand that ‘there is, in the case of spirits considered as a whole, an indeterminate number of beverages which must be classified as “similar products” within the meaning of the first paragraph of Article 95’. On the other hand, however, the Court adds in the same paragraph that ‘it may be difficult to decide this in specific cases, in view of the nature of the factors implied by distinguishing criteria such as flavour and consumer habits’. Since the other major products with which Case 171/78 was concerned were vodka, cognac, gin and rum, it seems likely that the Court also had whisky in mind when it added those words, especially in the light of paragraphs 9 to 13 of the Court's judgment of the same date in Case 168/78 which are more explicit in that regard. With regard to consumer habits, at receptions whisky is normally served — after dilution of the alcohol content by the addition of water, soda water or ice — in the same way as aperitifs, liqueur wines and other long drinks such as Campari Soda, gin and tonic or other alcoholic beverages which are clearly related thereto, which have been diluted with soda water or tonic. However, the question arises whether the classification of whisky as spirits on the one hand or as a liqueur wine or aperitif on the other should again be left in abeyance in these proceedings. The length of John Walker's written and oral submissions in support of the view that whisky and liqueur wine are similar products, and the fiscal and economic consequences of the Court's answer, underline the importance of this question.
1.2. The market trend for the products concerned in Denmark
In order to gain a proper grasp of the economic background to both cases, I consider it desirable in the first place to incorporate in my Opinion the statistics furnished by the Danish Government and set out in Annexes II and IV to its answers to the questions put to it by the Court. The figures set out in Annex II have the twofold advantage of facilitating a comparison with the Commission's scheme for harmonization and of clarifying the share of the market held by the different types of alcoholic beverages and the ratio between domestic production and imports from other countries. Annex IV illustrates in more detail the trend regarding the importation of whisky in general and of ‘Johnny Walker’ whisky in particular.
Survey of consumption of alcoholic beverages chargeable to duty (1971-1984)
Year
Grape wine of the table-wine
Fruit wine of the table-wine type
Grape wine of the liqueur-wine type
Fruit wine of the liqueur-wine type
Spirits
Total
% imports
Total
Imports
Total
% Imports
Total
Imports
Total
Imports
1 000 l
%
1 000 l
1 000 l
%
1 000 l
%
1 000 l
1 000 l
%
1 000 l
1 000 l
%
1971
21 803
100
415
0
0
7 976
100
2 917
23
0,8
16 484
4 000
26,7
1972
24 803
100
742
2
0,3
8 513
100
3 297
5
0,2
18 141
4 847
26,7
1973
37 745
100
875
14
1,6
11 185
100
4 156
5
0,1
18 205
4 607
25,3
1974
34 893
100
1 132
12
1,1
9 294
100
3 357
19
0,6
19 075
4 645
24,4
1975
42 841
100
1 149
19
1,7
9 855
100
4 234
33
0,8
21 414
5 657
26,4
1976
47 195
100
921
6
0,7
11 063
100
4 374
35
0,8
23 524
6 557
27,9
1977
44 081
100
846
19
2,3
10 425
100
4 040
24
0,6
22 312
6 120
27,4
1978
47 434
100
1 012
94
9,3
10 127
100
3 852
35
0,9
16 856
3 682
21,8
1979
53 973
100
1 393
239
17,2
11 127
100
4 527
42
0,9
18 356
4 268
23,3
1980
55 260
100
1 649
335
20,3
10 048
100
4 822
29
0,6
19 244
5 215
27,1
1981
64 486
100
1 899
562
29,6
10 328
100
5 678
25
0,4
20 003
5 702
28,5
1982
70 645
100
1 943
541
27,8
10 336
100
5 880
34
0,6
20 614
6 016
29,2
1983
78 554
100
2 282
758
33,2
8 957
100
6 670
30
0,5
19 566
5 423
27,7
1984
79 991
100
1 783
739
41,5
8 225
100
6 416
67
1,0
19 100
5 506
28,8
I should like to begin by making the following remarks in relation to the first set of statistics.
In the first place, it is clear that the increase in consumption of fruit wine other than wine of the liquer type after 1977 was primarily to the advantage of imports of fruit wine from other countries and not to the detriment of imports of table wine made from grapes, which have increased to a much greater extent in volume and virtually to the same extent in percentage terms.
Secondly, the impression that fruit wine of that kind is protected either directly or indirectly, which may be gained from the undoubtedly lower rate of tax charged per litre of such wine, is not confirmed by those figures either. The share of the market held by that fruit wine (including imported fruit wine) has always been less than 3% of the share of the market held by table wine made from grapes, even after 1977. In that respect the amounts at issue in Case 106/84 are relatively insignificant and the Commission may attach some importance to them on account of the disruptive effect which the difference in the tax on table wine and on fruit wine may have on its proposals to achieve harmonization. However, those remarks concerning table wine are incomplete without the observation that consumption of fruit wine of the liqueur type has steadily increased since 1978 (by almost 70%), that imports of grape wine of the liqueur type over the same period (after rising in 1979) have steadily fallen (by approximately 20% in all) and that imports of fruit wine of the liqueur type have invariably accounted for less than 1% of total consumption. This is the result of the protectionist effect of the different rates of tax for liqueur wine made from grapes and for liqueur wine made from other fruit. Accordingly, it may not be purely fortuitous that at the hearing the Commission referred exclusively to liqueur wine as the subject-matter of the dispute.
Thirdly, it is striking that although spirits are taxed more heavily than liqueur wine, they have consistently held a significantly larger share of the market (in the region of 20% to 30%) since 1978. In my view, that finding is in itself of some importance for the assessment of the question whether whisky has been subject to direct or indirect discrimination as ą^result of being classified in the category of spirits rather than in that of liqueur wine.
Fourthly, it would appear that after a slump in 1978 (the year in which proceedings were instituted against Denmark in Case 171/78), imports of spirits increased to a far greater extent (that is to say by approximately 50%) than total consumption of spirits (which rose by no more than approximately 20%).
As regards imports of whisky in particular, Annex IV to the Danish Government's answer is of particular interest:
Danish imports and exports of whisky 1975-1984
Year
Imports of whisky
per 1 000 l (1)
Exports of whisky
per 1 000 l (1)
Imports of Johnny Walker
per 1 000 l (2)
1975
3 983
466
453
1976
4 654
529
533
1977
3 970
566
509
1978
3 509
495
343
1979
2 722
85
328
1980
2 786
84
314
1981
3 232
95
268
1982
3 320
151
245
1983
3 374
311
219
1984
3 848
103
—
(1) Source: Foreign Trade Statistics issued by the Danish Statistical Office.
(2) Source: Written observations submitted by John Walker's representative.
It is clear from that second statistical table that between 1 January 1980 (the year in which the Court delivered its judgment of 27 February 1980 in Case 171/78) and 1 January 1985 imports of whisky rose by approximately 30% although imports of Johnny Walker over the same period declined by the same proportion (and to a much greater extent over a longer period). I would remind the Court that at the hearing John Walker's representative attributed that reversal in the trend to the effect of the high ad valorem charge included in Danish excise duty on spirits. Clearly, more expensive products are taxed more heavily than cheaper products.
1.3. Subdivision of this Opinion
Following my general introduction to the two cases I shall proceed, in view of the similarities and the differences between them, in the following manner: in the second and third parts of my Opinion I have incorporated the facts and the conclusions, submissions and arguments of the parties in Cases 106 and 243/84 as set out in the Reports for the Hearing and supplemented by certain details of my own. In the fourth part of my Opinion I shall briefly analyse the 12 judgments of the Court which are relevant for one of the two cases (five judgments) or for both cases (seven judgments). In that connection I will consider in particular what conclusions may be drawn from those judgments with regard to the two cases at issue. Finally, in the fifth part of my Opinion, I shall set forth my conclusions in Case 106/84 and in Case 243/84 in turn. In the fourth and fifth parts of my Opinion I shall also devote some attention to any fresh arguments presented at the hearing.
2. The facts and the conclusions, submissions and arguments of the parties in Case 106/84
2.1. Facts
2.1.1.
The Danish legislation charging duty on alcoholic beverages distinguishes three categories: (1) spirits, (2) wine and fruit wine and (3) beer.
2.1.2.
Article 1 (1) of Coordinated Law No 371 of 1 July 1982{Lovtidende, A, 1982), as amended by Law No 149 of 11 April 1984, which charges duty on wine and fruit wine, specifies which products are taxable :
products coming within headings 22.04 to 22.06 of the Common Customs Tariff, namely grape must, in fermentation or with fermentation arrested otherwise than by the addition of alcohol, wine of fresh grapes, grape must with fermentation arrested by the addition of alcohol, vermouths and other wines of fresh grapes flavoured with aromatic extracts, of an alcoholic strength not exceeding 23% by volume and a specific gravity not exceeding 1.07 at 20o Centigrade;
beverages coming within heading 22.07 of the Common Customs Tariff, namely fruit wines and related products, of an alcoholic strength not exceeding 20% by volume and a specific gravity not exceeding 1.06 at 20o Centigrade;
other beverages of an alcoholic strength not exceeding 23% by volume and a specific gravity not exceeding 1.07 at 20o Centigrade, manufactured from wines or fruit wines falling within tariff headings 22.04 to 22.07.
Grape wine of an alcoholic strength of 23% by volume and fruit wine of an alcoholic strength of 20% by volume are covered by points 2 and 3 of Article 1 (1) of Coordinated Law No 370 of 1 July 1982 charging duty on spirits {Lovtidende, A, 1982).
2.1.3.
Point 1 of Article 2 (1) of Coordinated Law No 371 fixes the rate of duty per litre of grape wine at DKR 10.725 for table wine, at DKR 19.93 for sparkling wine and at DKR 19.93 for other products. Point 2 of Article 2(1) fixes the rate of duty per litre of fruit wine at DKR 6.92 for wine of the table-wine type of an alcoholic strength not exceeding 14% by volume and at DKR 11.02 for other products.
2.1.4.
Law No 371 does not define fruit wine. According to a circular issued in 1978 by the Danish Directorate General for Customs, fruit wine is a product manufactured by the fermentation of fruit juice or honey, but without subsequently being distilled. It must contain at least one litre of pure undistilled fermented alcohol per 100 litres. Within the limits laid down by law for the purposes of classification, the alcohol content of such wine may be increased by the addition of distilled alcohol.
2.1.5.
In a letter of 21 September 1982 addressed to the Danish Government, the Commission pointed out that Coordinated Law No 371 is contrary to Article 95 of the EEC Treaty inasmuch as it accords more favourable tax treatment to domestic fruit wine than to imported grape wine, which is a similar or at least a competing product.
2.1.6.
In its reply of 25 November 1982, the Danish Government denied that there was any similarity or competitive relationship between those products. It emphasized that harmonization had not been achieved at Community level in the field of taxation.
2.1.7.
On 9 September 1983 the Commission delivered a reasoned opinion in which it charged the Danish Government with infringing Article 95 of the EEC Treaty and requested it to comply with the terms of its opinion within one month.
2.1.8.
In its reply of 17 November 1983 the Danish Government denied infringing Article 95 of the EEC Treaty.
2.2. Conclusions of the parties
2.2.1.
The Commission claims that the Court should:
Declare that by failing to impose uniform taxes on wine made from grapes and on wine made from other fruit, the Kingdom of Denmark has failed to fulfil its obligations under the first paragraph, or in the alternative under the second paragraph, of Article 95 of the EEC Treaty;
Order the Kingdom of Denmark to pay the costs.
2.2.2.
The Kingdom of Denmark, the defendant, contends that the Court should:
Dismiss the application as unfounded;
Order the Commission to pay the costs.
2.3. Submissions and arguments of the parties
2.3.1.
The Commission maintains that the Danish legislation is contrary to Article 95 of the EEC Treaty.
(a)
In its view, Article 95 must be set in the context of the provisions of the Treaty relating to competition and the free movement of goods. It unequivocally prohibits, following the abolition of customs duties and charges having equivalent effect, other barriers to trade in the form of discriminatory taxation imposed on imported products which are identical or similar to, or in competition with, domestic products. The Court held in its judgments of 27 February 1980 in Cases 168/78 (Commission v France [1980] ECR 347), 169/78 (Commission v Italy [1980] ECR 385) and 171/78 (Commission v Denmark [1980] ECR 447) that Article 95 must be applied oh the basis of objective criteria, permitted no exceptions and took precedence over any policy considerations. As a fundamental principle of the customs union, it could not be applied conditionally or interpreted in a manner which was incompatible with the rules of the Treaty. A national tax system should not produce, in relation to traders in other Member States, secondary effects which were contrary to the attainment of a common market. Article 95 therefore substantially restricts the freedom enjoyed by Member States in fiscal matters.
(b)
The existence of similarity between two products should be assessed in concreto. According to the criteria elicited by the Court in its judgments of 4 April 1968 in Case 27/67 (Fink-Frucht [1968] ECR 223), 17 February 1976 in Case 45/75 (REWE [1976] ECR 181), 10 October 1978 in Case 148/77 (Hansen [1978] ECR 1787), 27 February 1980 in Cases 168, 169 and 171/78, referred to above, and 15 March 1983 in Case 319/81 (Commission v Italian Republic [1983] ECR 601), grape wine and fruit wine are similar products. They possess similar properties, meet the same needs, are manufactured by fermentation, are of a similar alcoholic strength and are consumed in the same quantities. The fact that different raw materials are used in their production does not preclude any similarity between them. The Court has acknowledged that the same classification for tariff purposes raises a presumption of similarity, but that a different classification does not necessarily preclude similarity. The Common Customs Tariff classification, which is based on the earlier Brussels Nomenclature, is not necessarily bound up with the structure of the EEC Treaty. Products which are manifestly similar are classified under different headings, whereas the same heading often covers dissimilar products. Certain features of the Danish tax system are undoubtedly discriminatory or protective, since the bulk of domestic wine production, consisting of fruit wine, falls within the favourable tax category, whereas almost all imported products, namely grape wines, are heavily taxed.
In reply to the Kingdom of Denmark's argument to the effect that the Commission has not argued that the Danish legislation is also contrary to the free-trade agreement with Portugal, the Commission observes that Article 21 of that agreement, which moreover is governed by the principle of reciprocity, prohibits taxation which discriminates against similar products. Portugal did not raise the question of the imposition of Danish duty on fruit wine at the meetings of the joint committee responsible for the management and enforcement of the agreement. The application which is the subject-matter of these proceedings is based solely on Article 95 of the Treaty and the Commission has not adopted a position on the question whether Article 21 is also relevant.
The argument that the Commission did not contest the legislation in force at the time, which was enacted after Denmark's accession to the Community, carries no weight. The Commission has never waived its right to ensure that national tax systems are in conformity with Community law.
(c)
Even on the assumption that grape wine and fruit wine are only competing products, the relevant Danish legislation is none the less of a discriminatory and protective nature. Article 95 should be applied in toto. It prohibits any barrier to the free movement of goods which distorts the conditions of competition. Examination of the Danish legislation in the light of the criteria laid down by the Court in its judgment of 12 July 1983 in Case 170/78 (Commission v United Kingdom [1983] ECR 2265) reveals the discriminatory nature of the tax on imported grape wine in relation to the alcohol content and the volume. The imposition of duty at the same rate on domestic and imported products, which is expressed as a percentage of the retail price, does not preclude distortion detrimental to imported products.
(d)
The Danish tax system is not neutral since the bulk of domestic production falls within the more favourable tax category. Differential taxation based on objective criteria, such as the raw material used or the manufacturing process, is legitimate at the present stage of the development of Community law. However, such taxation should pursue objectives of economic policy which are also compatible with Community law. It may not discriminate, either directly or indirectly, against importers or protect competing domestic products. In its judgments of 14 January 1981 in Case 140/79 {Chemial Farmaceutici [1981] ECR 1) and in Case 46/80 {Vinal [1981] ECR 77), the Court held that differential taxation of denatured synthetic alcohol and of denatured alcohol obtained by fermentation was a legitimate objective of industrial policy, designed to promote the distillation of agricultural products. However, the preferential treatment of Danish fruit growers as against wine producers in other Member States cannot be considered legitimate.
The initial proposals aimed at achieving harmonization were concerned with the following four categories: alcohol, beer, wine and mixed beverages. According to the original proposal, fruit wine falling within tariff heading 22.07 and of an alcoholic strength in excess of 15% by volume was to be taxed at the full rate. The absence in either the initial or the subsequent proposals of provisions concerning fruit wine of an alcoholic strength of less than 15% does not constitute authorization to discriminate against similar or competing imported products. The achievement of harmonization is not a prerequisite for the observance of Article 95. In countries which manufacture large quantities of beverages of different kinds, such as wine and beer, differential taxation must not lead to discriminatory taxation of imports. If it does, the ratio between the rates of duty applied to the different categories of beverages should be fixed by means of harmonization.
2.4.
The Government of the Kingdom of-Denmark denies infringing Article 95 of the EEC Treaty in any way.
(a)
The legislation which Denmark adopted at the time of its accession to the European Communities abolished traditional discrimination against imported wine. No fundamental amendments were made to that legislation subsequently. The Commission, to whom the new legislation had been notified, never contested the differential rates of taxation and confined itself to promoting harmonization.
Imports of fruit wine of the table-wine type were practically nonexistent under the legislation previously in force but accounted in 1983 for 33% of total consumption. The proportion of imports of highly taxed fruit wine remained small as a result of the quality of the Danish products and the commercial efficiency of manufacturers. In 1983 a third of the production of fruit wine other than table wine was exported. Those figures demonstrate the accessibility of the Danish market in fruit wine, which, moreover, is much smaller than the market in grape wine.
The legislation previously in force had as its stated purpose to assist Danish fruit growers. The statistics relating to the period from 1972 to 1982 show that the quantity of fruit harvested varies appreciably from one year to the next and that the surface area given over to the cultivation of apple trees has steadily diminished inter alia under the impact of foreign competition and a systematic grubbing-up policy. There is no overproduction of apples in Denmark. Imports are intended mainly for direct consumption or for the manufacture of apple juice, whilst a substantial proportion of domestic production is used for the manufacture of fruit wine. In order to restrict domestic production of fruit wine, the juice used for that purpose is taxed.
The legislation in force does not discriminate in any way against products on the basis of their origin. It is in conformity with Article 39 of the EEC Treaty inasmuch as it seeks to provide the agricultural community with a reasonable standard of living without leading to overproduction.
(b)
The first and second paragraphs of Article 95 complement one another and together help to ensure freedom of movement. However, they do not constitute a single provision since each paragraph has its own field of application. It is clear from the judgments in Fink-Frucht, REWE and Commission v United Kingdom, referred to above, that the first paragraph is concerned with the taxation of products, quite apart from the incidence of taxation on the final, price, whilst in the second paragraph the incidence of taxation is decisive. If a tax system is manifestly protectionist, whilst the extent to which the products are similar or competing is less certain, the Court can confine itself, as it did in Case 171/78, to declaring that the system has a protective effect. In this case, the discriminatory or protective effect of the Danish legislation must be established with certainty.
(c)
Grape wine and fruit wine are not similar products. Rules regulating the manufacturing process exist only in respect of grape wine. Fruit wine may be an industrial or a homemade product. According to a ministerial circular, the product involved is manufactured by the fermentation of fruit juice or honey and must contain at least one litre of undistilled fermented alcohol, measured as 100% pure ethyl alcohol per 100 litres. Normally, apple juice is fermented until it has an alcoholic strength of 6o to 8o. The finished product is obtained by the addition of unfermented cherry juice and ethyl alcohol. Unlike grape wine, fruit wine displays the same characteristics every year. In the aforementioned judgments in Fink-Frucht and REWE, the Court recognized the importance of the Common Customs Tariff classification of products for the purpose of assessing their similarity. The Court tempered its position, without retreating from it, in its judgments of 27 February 1980. Unlike grape wine, fruit wine is not covered by a common organization of the market. If the products concerned are similar, such a difference in treatment is incompatible with the prohibition laid down by Article 40 (3) of the EEC Treaty of any kind of discrimination under the common agricultural policy.
According to the Court's judgment of 26 October 1982 in Case 104/81 {Kupferberg [1982] ECR 3641), Article 21 (1) of the free-trade agreement with Portugal corresponds to the first paragraph of Article 95 of the EEC Treaty. The Commission has not referred to those Portuguese products which hold an important share of the market. It cannot at one and the same time contend that the first paragraph of Article 95 of the EEC Treaty has been infringed and tacitly accept that Article 21 of the free-trade agreement has not.
(d)
The existence of competition between grape wine and fruit wine does not support the conclusion that differential taxation affords protection to domestic production.
Examination of the contested taxation in the light of the criteria set out in the judgment of 12 July 1983 in Case 170/78 shows that the Danish legislation has no protectionist effect. As regards the ratio between the fiscal burden and the volume of wine, the surcharge on grape wine amounts to 55% for table wine and 80% for liqueur wine. As regards products with an alcoholic strength of between 20o and 23o, fruit wine, which is taxed as spirits, is surcharged at approximately 170%. As regards the ratio between the fiscal burden and the alcoholic strength, grape wine is surcharged at 66% to 135%. Duty represents virtually the same proportion of the retail price in the case of both categories of products (namely 23% to 38% in the case of fruit wine and 11% to 40% in the case of table wine made from grapes, according to the defence. The method of calculation is explained in the rejoinder). The Court has not adopted a position with regard to the importance of those criteria. However, the incidence of tax on the price is decisive as far as the application of the second paragraph of Article 95 is concerned. Profit margins in the wholesale or retail trade are of no consequence for the calculation of the incidence of tax. The comparison should relate to grape wine in the cheapest categories, in respect of which the incidence of tax on the price is highest and in respect of which the existence of a competitive relationship with fruit wine cannot be ruled out a priori. In the case of table wine, the tax on that type of grape wine, which represents 90% of total sales of grape wine of the table-wine type, accounts for less than 30% of the price, as against 26% to 29% in the case of fruit wine. In the case of low quality liqueur wine, the tax accounts for between 25% and 38% of the price for grape wine as against 27% to 38% of the price for fruit wine. Those figures demonstrate that the Danish legislation has no protectionist effect for the purposes of the second paragraph of Article 95.
(e)
In Hansen and in its judgments of 27 February 1980, the Court acknowledged that the Member States may retain favourable tax arrangements which are justified on legitimate economic and social grounds, such as the use of certain raw materials or support for certain categories of producers. However, those arrangements should be applied without distinction to imported products under the same conditions. The purpose of the Danish legislation is to guarantee fruit growers working in difficult climatic conditions a sufficient income and to support that particular sector of production. In Chemial and Venal, the Court accepted the differential taxation of alcohol of agricultural origin and synthetic alcohol without, moreover, referring to a decision of the Community institutions granting aid in favour of alcohol of agricultural origin. In Denmark, imported products benefit from favourable arrangements, without the actual conditions of production being taken into account.
Favourable treatment of products which can be manufactured in the importing State may constitute evidence that the tax legislation has a hidden protectionist effect, but not proof that Article 95 has been infringed. The Commission's approach leads to unacceptable discrimination between the Member States. If the legislation enacted by Denmark, whose climate permits it to produce only fruit wine, is to be assessed in the light of Article 95, then the differential taxation which exists in France and in Luxembourg, which produce both categories of wine, should be abolished by means of harmonization.
3. The facts, the questions submitted, the written observations submitted to the Court and the answers given to questions from the Court in Case 243/84
3.1. Facts and questions submitted
3.1.1.
The Danish legislation charging duty on alcoholic beverages distinguishes three categories: (1) spirits, (2) wine and fruit wine and (3) beer.
3.1.2.
Article 1 (1) of Coordinated Law No 370 of 1 July 1982{Lovtidende, A, 1982), as amended by Law No 149 of 11 April 1984, which charges duty on spirits, specifies the products which are taxable; they include:
spirits, including ethyl alcohol, coming within heading 22.09 of the Common Customs Tariff, namely spirits, liqueurs and other spirituous beverages, compound alcoholic preparations (known as ‘concentrated extracts’) for the manufacture of beverages ;
products coming within headings 22.05 and 22.06 of the Common Customs Tariff, namely wine of fresh grapes, grape must with fermentation arrested by the addition of alcohol, vermouths and other wines of fresh grapes flavoured with aromatic extracts and whose alcohol content exceeds 23% by volume;
beverages falling with heading 22.07 of the Common Customs Tariff, namely other fermented beverages (for example, cider, perry and mead) of an alcoholic strength exceeding 20% by volume;
beverages falling within headings 22.04 to 22.07 of the Common Customs Tariff which are in the nature of spirits as a result of the addition of bitter or aromatic substances, sugar and so on.
According to Article 2, the duty on spirits consists of a specific duty per litre of pure ethyl alcohol and an ad valorem duty. The taxable value of the goods is equivalent in principle to the highest wholesale price of the beverage concerned including duty on spirits (both the specific duty per litre of ethyl alcohol and the ad valorem duty), but excluding value-added tax. That tax system was introduced as a result of the judgments of 27 February 1980 in Case 171/78 (Commission v Denmark [1980] ECR 447) and Case 68/79 {Hans Just [1980] ECR 501), in which the Court considered that the difference between the rates of duty for aquavit and for other spirits was contrary tö Article 95 of the EEC Treaty.
3.1.3.
Article 1 (1) of Coordinated Law No 371 of 1 July 1982{Lovtidende, A, 1982), as amended by Law No 149 of 11 April 1984, which charges duty on wine and fruit wine, specifies as taxable products the following:
products falling within headings 22.04 to 22.06 of the Common Customs Tariff, namely grape must, in fermentation or with fermentation arrested otherwise than by the addition of alcohol, wine of fresh grapes, grape must with fermentation arrested by the addition of alcohol, and vermouths and other wines of fresh grapes flavoured with aromatic extracts, of an alcoholic strength not exceeding 23% by volume and a specific gravity not exceeding 1.07 at 20o Centigrade;
beverages coming within heading 22.07 of the Common Customs Tariff (fruit wines and related products) of an alcoholic strength not exceeding 20% by volume and a specific gravity not exceeding 1.06 at 20o Centigrade;
other beverages of an alcoholic strength not exceeding 23% by volume and a specific gravity not exceeding 1.07 at 20o Centigrade, manufactured from wines or fruit wines falling within headings 22.04 to 22.07 of the Common Customs Tariff.
According to Article 2, those products are subject to a specific duty calculated per litre of the beverage, without reference to the value of the goods. A distinction is drawn between wine manufactured from grapes and wine manufactured from other fruit. In the case of grape wine, the law establishes different rates for table wine (not sparkling), sparkling wine and other beverages, including liqueur wine. Within the category of fruit wine, a distinction is drawn between beverages of the table-wine type which have a maximum ethyl alcohol content of 14% by volume, and fruit wine of the liqueur type, the alcohol content of which varies between 14% and 20% by volume, beyond which limit beverages are assessed for duty as spirits.
3.1.4.
Law No 371 does not define fruit wine. According to a circular issued in 1978 by the Danish Directorate General for Customs, fruit wine is a product manufactured by the fermentation of fruit juice or honey, but without subsequently being distilled. It must contain at least one litre of pure undistilled fermented alcohol per 100 litres. Within the limits laid down by law for the purposes of classification, the alcohol content may be increased by the addition of distilled alcohol excluding flavoured alcohol, such as cognac, rum or whisky.
3.1.5.
According to Article 33 of Law No 370 and Article 25 of Law No 371, a special committee established under the law on value-added tax is responsible for assessing beverages for duty.
3.1.6.
John Walker & Sons Ltd, the plaintiff in the main proceedings, produces and markets, under the brand name ‘Johnny Walker’, Scotch whisky of an alcoholic strength of 40o. In 1982 it instituted proceedings against the Danish Ministry for Fiscal Affairs before the Østre Landsret for an order abolishing taxation which differentiates, contrary to Article 95 of the EEC Treaty, between Johnny Walker whisky and similar or competing Danish products, namely certain kinds of fruit wine of the liqueur type.
3.1.7.
By judgment of 27 September 1984 the Østre Landsret stayed the proceedings pending a decision by the Court of Justice, to be given by way of a preliminary ruling, on the following questions:
(1)
Must the first paragraph of Article 95 of the EEC Treaty be interpreted as meaning that Scotch whisky and fruit wine of the liqueur type, as described in the law in question and in the annex to the Østre Landsret's decision, are to be regarded as ‘similar... products’, the one being imported and the other of domestic origin, with the result that it is contrary to that provision to maintain tax rules whereby whisky, like other distilled spirits, is subject to a combined duty calculated partly on the basis of its alcohol content and partly on the basis of its price, whilst the tax on fruit wine (and wine made from grapes) is calculated solely in relation to the quantity of the beverage, where the tax rules result in a lower duty on fruit wine (and wine made from grapes) than on whisky, where those rules do not make a distinction on the basis of the beverages' country of origin, where no whisky is manufactured in the Member State concerned, but approximately three-quarters of the beverages consumed which are subject to the higher duty (that applicable to spirits) are of domestic origin, and where more than 99% of the fruit wine of the liqueur type consumed is of domestic origin?
(2)
Must the second paragraph of Article 95 be interpreted as meaning that in the circumstances set out in Question 1 a comparison between the duties on Scotch whisky and on fruit wine of the liqueur type should be undertaken? If so, is it contrary to that provision if the duties, considered in relation to the beverage's price, quantity and alcohol content, are as described in the annex to the Østre Landsret's decision?
(3)
For the purpose of answering Questions 1 and 2 is it relevant that the historical basis for the rules on the taxation of fruit wine is a desire to provide fruit growers who work in difficult climatic conditions with a wider market for their produce?
3.1.8.
In accordance with Article 20 of the Protocol on the Statute of the Court of Justice of the EEC, written observations were submitted by the Commission of the European Communities, John Walker & Sons Ltd, the plaintiff in the main proceedings, the Government of the Italian Republic and the Danish Government.
3.1.9.
Upon hearing the report of the Judge Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory enquiry. However, it requested the Commission and the Danish Government to reply in writing to certain questions. The parties acceded to that request within the specified period.
3.2. Written observations submitted to the Court
3.2.1.
John Walker & Sons Ltd, the plaintiff in the main proceedings, outlined certain considerations of a general nature before examining the questions referred to the Court for a preliminary ruling.
(a)
The Danish legislation at issue imposes on spirits a high specific duty per litre of ethyl alochol and a high ad valorem duty. Ad valorem duty represents 60% of the wholesale price, whereas duty per litre represents 12% thereof. Fruit wine of the liqueur type, which comes within tariff heading 22.07 and the alcoholic strength of which does not exceed 20% by volume, is subject only to a specific duty, which is lower. The legislation in force prior to Denmark's accession to the Community afforded overt protection to domestic production of fruit wine. The new legislation abolished the difference in treatment between domestic and imported fruit wine but not that between fruit wine and grape wine or between imported spirits and competing Danish products. The legislation currently in force was introduced after the Court declared on 27 February 1980, in a number of judgments referred to earlier, that taxation which discriminates between imported and domestic spirits was contrary to Article 95 of the EEC Treaty. The Danish tax system, which has retained its traditional structure, is now used to protect Danish fruit wine against similar or competing imported products.
The range of fruit wine includes, alongside traditional cherry liqueurs, new products such as Scotch whisky suitable for consumption as aperitifs.
A bottle of Johnny Walker of an alcoholic strength of 40% by volume is subject, at a wholesale price excluding VAT of DKR 117.69, to a combined duty of DKR 79.56, whereas a liqueur wine of an alcoholic strength of 19.5% by volume is subject, at a retail price of DKR 27.95, to a specific duty of only DKR 7.71. Between 1977 and 1983, exports of Johnny Walker Red Label to Denmark declined steadily, whereas exports to other Member States increased. During the same period, Danish consumption of fruit wine of the liqueur type increased, with domestic products accounting for 99% of such consumption. No whisky is produced in Denmark. Consumption of fruit wine of the liqueur type amounts to 6.6 million litres per annum, including 3.9 million litres of wine other than cherry liqueurs. Out of a total consumption of 14.5 million litres of spirits, 5.5 million litres are imported.
The differences between national tax systems affect the consumer's freedom of choice and hinder the free movement of goods. In the absence of harmonization, Article 95 of the EEC Treaty has not established a common market in alcoholic beverages. However, that provision does make it possible to take action against discriminatory legislation such as the Danish rules. Production of liqueur wine has been able to develop in Denmark only as a result of the protectionist tax system. That product is neither exported nor imported in substantial quantities.
(b)
The first question submitted by the national court is concerned with the compatibility of differential taxation with Community law. Liqueur wine is taxed as a fermented product, in spite of the fact that 95% of its alcohol content consists of added distilled ethyl alcohol and that its flavour and colour is altered by the addition of aromatic extracts or substances. The method of taxation applicable to grape wine is not under challenge in this case.
In its judgments of 17 February 1976 in Case 45/75 (REWE [1976] ECR 181) and of 15 July 1982 in Case 216/81 (Cogis [1982] ECR 2701), the Court considered that products which exhibit similar characteristics and meet the same needs are similar. The decisive criterion is the possible degree of substitution and not the raw material, the nature of the product, whether industrial or agricultural, or the method of manufacture, whether by fermentation or by distillation. The Court stated in REWE and in its judgment of 27 February 1980 in Case 168/78 (Commission v French Republic, [1980] ECR 347) that the Common Customs Tariff may provide guidance but does not constitute conclusive evidence of similarity.
With regard to the attainment of the free movement of goods under normal conditions of competition, Article 95 complements the provisions on the abolition of customs duties and charges having equivalent effect. It abolishes discriminatory internal taxation and guarantees the complete neutrality of such taxation as regards competition. In its judgment of 27 February 1980 in Case 170/78 (Commission v United Kingdom [1980] ECR 417), the Court considered not only the present state of the market but also the possibilities for development and the further potential for the substitution of products in connection with the fuller development of freedom of movement. The tax policy of a Member State should not therefore crystallize given consumer habits so as to consolidate an advantage acquired by national industries.
The similarity and competitive relationship between products should therefore be measured by reference to consumer habits in the different Member States. Even though they are not identical products, Scotch whisky and the liqueur wine in question complement and can be substituted for one another. They are marketed in the same places, consumed on the same occasions and exhibit similar characteristics. As the Court has acknowledged, whisky can be consumed in different ways, which means that it competes with other beverages with a lower alcohol content and more restricted uses. In assessing the similarity or competitive relationship between products, the Court does not attach particular importance to the alcoholic strength of a beverage. The maximum alcohol content, which determines the tax rules to be applied, is no longer a characteristic of the product but has become a manufacturing criterion. The Danish tax system provides for the differential taxation of distilled alcohol; when contained in whisky it is heavily taxed but in liqueur wine it is moderately taxed.
The similarity or competitive relationship between all spirits or between liqueur wine and other beverages does not preclude the existence of such a relationship between spirits and liqueur wine. Tax policy should not influence demand for products by stamping an ordinary product in the country of origin with the hallmarks of a luxury product.
In the absence of substantial imports, the lack of an express distinction between imported and domestic liqueur wine is irrelevant. The fact that 75% of the beverages taxed as spirits and consumed in Denmark are of domestic origin is of no importance either. That proportion is merely a consequence of the tax protection afforded to aquavit which, in view of its fairly low price, is subject only to a low ad valorem duty. The argument to the effect that liqueur wine of the fruit-wine type bears a closer resemblance to liqueur wine of the grape wine type than to spirits is beside the point since fruit wine other than cherry liqueur is offered as a substitute for Scotch whisky. As far as the protection of public health is concerned, only the quantity of alcohol that is ingested matters, not the form in which it is consumed.
Accordingly, the answer to the first question should be that liqueur wine and whisky are similar products and that the difference in taxation is contrary to the first paragraph of Article 95.
(c)
The second question is concerned more particularly with the competitive relationship between the beverages in question for the purposes of the second paragraph of Article 95. In its judgment of 4 April 1968 in Case 27/67 (Fink-Frucht [1968] ECR 223), the Court held that the second paragraph of Article 95 is complementary to the first paragraph, inasmuch as it prohibits the imposition of any internal taxation which discriminates against the imported product in favour of a competing domestic product or which protects certain activities distinct from those used in the manufacture of the imported product. In determining whether products are similar or in competition with each other, consideration should be given to possibilities for the development of the market and to the further potential for the substitution of products for one another. It follows from the judgment of 12 July 1983 in Case 170/78 (Commission v United Kingdom [1983] ECR 2265) that certain products which are at first sight very different, such as wine or beer, can be substituted for one another since they are capable of meeting identical needs for similar groups of consumers who do not necessarily reside in a given State or region. Whisky is to the average English or Scottish consumer what fruit wine is to the average Danish consumer. Moreover, the latter consumes liqueur wine in the same manner as whisky. As regards the ratio between on the one hand the tax burden and on the other the quantity, alcohol content and price, which the Court adopted as criteria for comparison, whisky is substantially overtaxed by comparison with competing Danish products. Quite apart from the importance attached by the Court to a comparison of the rates of duty applied, the actual situation is such that even a comparison of that kind shows that the second paragraph of Article 95 has been infringed.
(d)
In its judgment of 10 October 1978 in Case 148/77 (Hansen and Balle [1978] ECR 1787), the Court acknowledged that at the present stage of the development of Community law, Member States may grant tax relief in respect of certain categories of products for legitimate economic or social purposes, provided there is no discrimination against imports or protection of domestic production. In the circumstances, ethyl alcohol, whether imported or domestically produced, is taxed at a uniform rate. The difference becomes apparent once such alcohol has been added to fruit wine. The substantial production of liqueur wine in Denmark can be explained only by that country's protectionist tax system.
The situation of fruit growers is no more unfavourable in Denmark than it is in other Member States in northern Europe. The principles of the common market would be called in question if the Member States were to impose special charges on products imported from other climatic zones. Fruit growing is a secondary form of production on farms. Danish fruit growers have constantly adapted their production to local conditions. The Minister for Fiscal Affairs never advanced that argument in the proceedings before the national court. If aid is needed, it should be granted in accordance with the criteria and procedures laid down by Articles 92 and 93 of the Treaty. Discriminatory taxation based on the climatic conditions prevailing in the Member States would lead to a division of the market which is incompatible with the fundamental principles embodied in Articles 2 and 3 of the EEC Treaty.
The third question should be answered in the negative.
3.2.2.
The Danish Government and, in particular, the Minister for Fiscal Affairs consider the questions submitted in their legal and economic context.
(a)
The Commission has instituted proceedings against Denmark for failure to fulfil its obligations by imposing a tax on grape wine which discriminates against fruit wine. It has not challenged the manner in which spirits and fruit wine of the liqueur type are taxed. The conformity with the EEC Treaty of the combined tax system established after the Court's judgment in Case 171/80 has never been called in question. In reply to a question from Parliament, the Commission has acknowledged that such a system is lawful and that the Danish legislation has no protective effect. The slight difference in treatment between fruit wine and grape wine is explained by the desire to assist fruit growers and favours both domestic and imported fruit wine. Similarly, the taxation of spirits does not vary according to the place of production.
Spirits produced in Denmark include schnaps, bitters and a number of liqueurs and other alcoholic beverages. The manufacture of whisky has ceased altogether as a result of foreign competition. A substantial proportion of the spirits consumed consists of imported products, of which whisky alone accounts for approximately 50%. The slump in the plaintiff's sales is not attributable to discriminatory taxation but to competition by cheaper whisky. As regards liqueur wine of a higher alcoholic strength, imports of grape wine are almost twice as high as consumption of fruit wine. Domestic products account for the bulk of the fruit wine consumed owing to the fact that they are of good quality. The vast majority of products which are taxed as spirits are of domestic origin, whilst most products subject to a lower tax are of foreign origin; that demonstrates that the Danish legislation does not have a discriminatory or protectionist effect.
The classification of beverages in different categories for tax purposes is not based on alcohol content alone but on the relevant Common Customs Tariff heading. The Common Customs Tariff classification, which serves as a point of reference for customs cooperation at international level, is based on the manufacturing process, the raw materials used and the typical flavour of the beverages in question. Fruit wine of the liqueur type is a fermented product. As in the case of certain kinds of grape wine, its alcoholic strength is increased by the addition of pure ethyl alcohol. If its alcoholic strength is greater than 20o, it is taxed as spirits. The plaintiff in the main proceedings could have argued before a special committee that, as a result of the admixture of alcohol, some of that wine has acquired the characteristics of spirits. In the case of Johnny Walker Red Label, the fiscal burden is equivalent to 50% of the retail price. In the case of typical Danish products, the incidence of taxation is greater. The fiscal burden per litre of beverage and per litre of pure alcohol is lower on liqueur wine than on Johnny Walker but higher than the fiscal burden on cheaper brands of whisky. The duty charged per litre of beverage and per litre of pure alcohol is a little lower in the case of fruit wine than it is in the case of grape wine. In terms of the percentage of the retail price, however, the duty charged is practically the same. In its proposals aimed at achieving harmonization, the Commission specified a bracket of 20% to 65% as regards the tax ratio per litre of pure alcohol between spirits and liqueur wine. Therefore, if calculated on the basis of the ethyl alcohol content, a duty on spirits which is five times as high as that imposed on liqueur wine is permissible. The Commission's proposals allow Denmark to maintain its combined tax system for a given period. The imposition of a higher tax on spirits is justified and is alone capable of ensuring that revenue from taxation remains at its present level.
(b)
The two paragraphs of Article 95 complement one another although each has its own field of application.
The first question is concerned with similarity within the meaning of the first paragraph of Article 95. The raw materials, the methods of manufacture — distillation in the case of whisky and natural fermentation in the case of fruit wine — and the properties of the products in question are different. For that reason, they are classified under separate headings of the Common Customs Tariff. The addition of neutral alcohol in order to increase the alcoholic strength does not transform fruit wine into spirits. A broad interpretation of the first paragraph of Article 95 to the effect that such products are similar would lead to an equally broad interpretation of the concept of domestic and imported products. The ad valorem charge in the duty on spirits is justified since this method of calculation is provided for by the common system of value-added tax.
(c)
As regards the second question, which is concerned with the second paragraph of Article 95, it must be pointed out that the Member States are entitled to tax spirits more heavily than liqueur wine and that the Danish legislation has neither the purpose nor the effect of protecting a specific category of beverages.
In view of the differences in quality and in the use to which they are put, Scotch whisky and liqueur wine are not competing products. Whisky is classified as spirits even if consumed in diluted form. The slump in the plaintiff's sales is attributable to competition by other brands of whisky, total consumption of which has increased. The differences in the rate of duty are within the bracket proposed by the Commission and are justified by the fundamental difference between the beverages concerned. A judgment by the Court requiring Denmark to accord the same tax treatment to whisky and liqueur wine, pursuant to the second paragraph of Article 95, would be binding on the Council since harmonization pursuant to Article 99 must not conflict with Article 95.
(d)
The desire to take account of the difficult working conditions of Danish fruit growers, which is referred to in the third question, lies at the root of the system of differential taxation. The Court has recognized that an objective system of preferential taxation is lawful.
3.2.3.
According to the Italian Government, it is necessary in the first place to ascertain whether the products concerned are similar or in competition with one another. A positive answer would raise the question of the compatibility of the Danish tax system with the principle of nondiscrimination embodied in Article 95.
(a)
According tó the judgment in REWE, two products are similar if they display similar characteristics and meet the same needs. Whisky, like other alcoholic beverages, is a distilled product characterized by its specific organoleptic properties and its high alcohol content. Liqueur wine is a fermented product characterized by its particular flavour and aroma and by its low alcohol content. Those products are distinguished by the manufacturing process, their composition and the needs and tastes which they meet. The addition in very small quantities of ethyl alcohol does not deprive liqueur wine of its fundamental characteristics which are those of wine and does not make it similar to spirits. Their high alcoholic content creates between all spirits a partial or potential competitive relationship. In its judgment in Case 171/78, the Court acknowledged that different spirits may be dissimilar owing to their specific characteristics. Not all beverages with a low alcohol content are similar, since each has its own distinctive flavour. A fortiori there is not the slightest similarity between such beverages and spirits.
(b)
The mere fact that whisky and liqueur wine are alcoholic beverages is insufficient to establish a partial or potential competitive relationship between them. Liqueur wine lacks a sufficiently high alcohol content and does not therefore meet the needs of whisky consumers. By the same token, spirits lack specific organoleptic properties and do not therefore constitute an alternative for consumers of liqueur wine.
The choice between differential taxation and uniform taxation does not come within the scope of Article 95 but is a matter for the Member States who are sovereign in fiscal matters. In the absence of a uniform Community system, the Member States are at liberty to impose different taxes on products which are similar or competing.
(c)
Even in the case of similar or competing products, a system of differential taxation pursuing a legitimate objective of economic policy is, at the present stage of harmonization, compatible with Article 95. A tax system should not be analyzed in abstract terms by reference to categories of similar or comparable products, but in concrete terms by reference to the product concerned and to its classification. Article 95 is infringed only where tax legislation is not applied in the same manner to domestic and imported products satisfying the same classification criteria, or where such criteria are neither objective nor neutral.
Spirits, including Scotch whisky and liqueur wine (made from grapes or other fruit), cannot therefore be regarded as similar or competing products. In any event, a system of differential taxation based on the objective characteristics of the beverages concerned is not contrary to Article 95, provided it also applies to imported products which satisfy all the conditions laid down by national legislation.
3.2.4.
The Commission, after summarizing the Danish legislation and the positions of the parties, considers the questions referred to the Court in the context of the efforts made to achieve harmonization.
(a)
Its initial proposals to harmonize the duties charged on beer, wine and alcohol date back to 1972. Following the suspension of work in that regard by the Council at the end of 1974, the Commission submitted fresh proposals in 1977 and 1979 which were not adopted. The duties charged on alcoholic beverages are justified on social grounds and constitute an important source of tax revenue. Only harmonization is capable of ensuring neutrality between all alcoholic beverages in the field of competition.
(b)
Article 95 prohibits barriers to trade which involve discriminatory taxation of identical, similar and/or competing imported products. That fundamental principle of the customs union, which is a corollary to the abolition of customs duties or charges having equivalent effect, does not permit any exceptions, may not be applied conditionally and may not be interpreted in a manner that is not in conformity with the EEC Treaty.
In Hansen and Balle, the Court gave a broad interpretation of the first paragraph of Article 95 which it extended to all tax arrangements that jeopardize equal treatment between domestic and imported products. According to the judgment in REWE, products which have comparable or like uses are similar.
The second paragraph of Article 95 prohibits any form of indirect tax protection of domestic products as against imported products, even where the latter are only partially, indirectly or potentially competing with the former. In Fink-Frucht, the Court inferred a competitive relationship from the existence of one or more economic purposes. Although the first paragraph of Article 95 is based on a comparison of fiscal burdens, the second paragraph is based on a more comprehensive criterion, that of the protective effect of a tax system.
(c)
In its judgments of 27 February 1980, the Court declared that a system taxing the bulk of domestic production less heavily than practically all imports had a protective effect and was therefore contrary to Article 95. Ninety-nine percent of the liqueur wine consumed in Denmark is of domestic origin. On the assumption that that product is in competition with imported whisky, the possibility that the Danish tax system may have a protective effect cannot be ruled out. The Commission has brought an action against Denmark for failure to fulfil its obligations by imposing discriminatory taxation on two kinds of liqueur wine, namely fruit wine and grape wine, which are manifestly similar, or at least competing, products. However, the assessment of the Danish tax system should not be limited to examining its effect on the consumption of whisky and the liqueur wine in question. Seventy-five percent of heavily taxed spirits are of domestic origin. In Case 171/78 the Court came to the conclusion that there was a similarity between Danish aquavit and Scotch whisky. Denmark is an important producer of spirituous beverages which are taxed as heavily as foreign spirits; hence its tax system cannot be said to discriminate against imports.
In its judgments of 14 January 1981 in Case 140/79 (Cbemial Farmaceutici [1981] ECR 1) and Case 46/80 (VW [1981] ECR 77), the Court acknowledged that in the absence of harmonization the Member States may establish a system of differential taxation based on objective criteria, such as the raw material or the manufacturing process, provided that the economic policy objectives pursued are compatible with Community law and that any kind of discrimination is avoided.
The answer to the questions raised by the national court should be that whisky and fruit wine of the liqueur type are not similar products; that Community law at the present stage of its development does not preclude a system of differential taxation based on objective criteria which are not discriminatory; that where a significant proportion of domestic production falls within each of the relevant tax categories, a system which, in the case of. whisky and domestically-produced spirituous beverages, is based on the alcoholic strength and on the price and, in the case of domestic and imported liqueur wine, on the volume alone, is compatible with the second paragraph of Article 95; and that Article 95, which is a fundamental safeguard of the principle of the free movement of goods, may not be applied conditionally.
3.3. Answers to questions from the Court
The Commission was invited to outline its proposals for achieving harmonization and, in particular, to indicate which beverages it regards as similar products. It pointed out that the steps taken by it had been unsuccessful. A proposal for a directive laying down certain rules on indirect taxes which affect the consumption of alcoholic drinks (85/C 114/08; Official Journal 1985, C 114, p. 6), which was submitted to the Council on 24 April 1985, establishes certain minimal rules in respect of wine and, in particular, a specific rate of tax based on volume in respect of still wine. According to the Court's judgment of 12 July 1983, the difference between the duty on wine and that on beer may not exceed, in respect of a specific quantity, the difference between the alcohol content of table wine and that of a given kind of beer. Moreover, in order to prevent the objectives of neutral taxation and the establishment of equal conditions of competition, pursued by the harmonization of the rules for charging duty, from being circumvented by the application of different rates of VAT, each Member State should apply the same rate of VAT within the following categories: wine and beer; wine and fruit wine to which alcohol has been added, and similar products; alcohol. A system maintaining the status quo would serve to promote long-term harmonization.
The proposal for a Council directive concerning the harmonization of excise duties on fortified wine and similar products (85/C 114/09; Official Journal 1985, C 114, p. 7), which was also submitted to the Council on 24 April 1985, is designed initially to achieve neutral conditions of competition and subsequently to harmonize the rates of duty applied. It applies to intermediate products of an alcoholic strength of between 15% and 20% by volume which are fermented products, for instance wine, and to distilled beverages such as spirits. The products concerned are natural fermented beverages to which alcohol or other ingredients have been added, but which have retained their characteristic flavour. The initial proposal applied only to products derived from grape wine since products derived from fruit wine of an alcoholic strength exceeding 15% by volume were to be regarded as spirituous beverages. In view of their similarity, the new proposal also includes products falling within heading 22.07 of the Common Customs Tariff. Since the addition of alcohol makes a fermented beverage increasingly comparable to a spirituous beverage, an upper limit of 22% by volume was established. In the case of products with a low alcohol content, the distinction between still wine and liqueur wine falling under tariff heading 22.05 may be based on the definitions set out in the relevant Community regulations. Products falling under tariff heading 22.06 (vermouths and other wines) are covered by the proposed directive provided they fall within the definition of vermouths set out in the proposal for a regulation submitted in 1982 (see Official Journal 1982, C 189, p. 7). Products falling under tariff heading 22.07 (other fermented beverages) of a total alcoholic strength of less than 15% by volume or of an actual alcoholic strength equal or inferior to 12% are excluded. The products concerned are subject to a specific duty calculated by reference to the volume and applied at a reduced rate by comparison with the rate applied to alcohol. The rate can be fixed by reference to the volume or the actual alcoholic strength by volume of the intermediate product or a combination of those two criteria. In any event, the aggregate fiscal burden should be the same for all intermediate products of the same actual alcoholic strength. The range of duties charged on those intermediate products varies at present from 7% to over 100% of the total fiscal burden borne by spirituous beverages and is to be brought within narrower limits, namely 20% and 65% respectively.
According to the Commission, beer, still wine and still wine made from fruit, sparkling wine and sparkling fruit wine, wine to which alcohol has been added and fruit wine to which alcohol has been added, and alcohol, constitute sufficiently homogeneous categories of beverages for the products to be regarded as similar. The same classification for tariff purposes merely raises a presumption of similarity.
Asked to explain the substantial proportion of distilled alcohol permitted in liqueur wine, the Danish Government stated that spirituous beverages are not automatically taxed as fruit wine if the end product is of an alcoholic strength not exceeding 20% by volume, including 1% by volume of fermented alcohol. The beverages concerned are intermediate products falling under tariff heading 22.07, manufactured by fermentation and of an alcoholic strength not exceeding 20% by volume. Products manufactured otherwise than by the fermentation of fruit juice or honey are taxed as spirits. An increase in the alcoholic strength by the addition of alcohol cannot affect classification. Most kinds of liqueur wine derived from grape wine are also fortified. In order to ensure that spirits are not taxed at a lower rate, beverages to which products other than ethyl alcohol are added that are taxable as spirits and beverages which exhibit the characteristics of spirits because they contain bitter or aromatic substances, sugar and so on, are also excluded. The requirement of a minimum fermented alcohol content of 1% by volume, prescribed by the relevant ministerial circular, constitutes a minimum condition and in no way replaces the conditions laid down by law. Proposal for a directive No 85/C 114/09 allows more favourable treatment to be accorded to intermediate products falling within tariff heading 22.07 and of an alcoholic strength exceeding 15% by volume, on condition that the distilled alcohol added represents less than 50% by volume of the actual alcohol content of the end product or that an actual alcoholic strength of at least 7% by volume in the end product has been obtained by natural fermentation. As regards the alcoholic strength by volume of the end product, provision is made for an upper limit of 22% as against the 20% limit currently applied in Denmark. On qualitative grounds, the addition of distilled alcohol is preferable to the natural fermentation of fruit juice. The plaintiff in the main proceedings endeavours to deflect the Court's attention away from the broad range of traditional Danish fruit wines, referred to in the questions submitted to the Court for a preliminary ruling, and towards certain less popular products.
In response to a request from the Court to provide a comprehensive picture of the consumption of alcoholic beverages in Denmark by reference to domestic and imported products, the Danish Government submitted a summary table showing consumption in Denmark for 1971 to 1984 of grape wine of the table-wine type, fruit wine of the table-wine type, grape wine of the liqueur type, fruit wine of the liqueur type, and spirits. Between 1975 and 1984, total consumption of whisky did not decline. The plaintiffs share of the market has declined for reasons other than those indicated by it. The relevant statistics have been incorporated in the introduction to this Opinion.
4. Relevant case-law
4.1. Criterion of simikrity
From the 12 judgments to which particular reference is made in the cases under consideration (namely the judgments in Cases 27/67, 31/67, 148/77, 45/75, 168/78, 169/78, 170/78 (two judgments), 171/78, 45/79, 46/80, 206/81 and 319/81) it is necessary to deduce, for the purpose of establishing similarity between products, which is a crucial factor in the application of the first paragraph of Article 95, the following criteria:
(a)
After initially attaching critical importance to classification for customs purposes (Case 27/67 Fink-Frucht [1968] ECR 223, especially the penultimate paragraph on p. 232), the Court tempered the importance of that criterion in its judgments of 1980 concerned with alcoholic beverages and finally departed from it altogether. In paragraph 8 of its judgment in Case 216/81 (Cogis [1982] ECR 2701), the Court stated that in applying the main substantive criteria there was no ‘need to refer to customs classifications’. That finding is significant in view of the fact that in Case 106/84 Denmark has relied inter alia on the difference in the customs classification of wine made from grapes and wine made from other fruit.
(b)
In Case 45/75 (REWE [1976] ECR 181) the Court laid down for the first time (in paragraph 12 of its decision) as the main criterion for establishing similarity whether the products to be compared at the same stage of production or marketing have similar characteristics and meet the same needs from the point of view of consumers (reaffirmed in Case 216/81, Cogis [1982] ECR 2701). In Case 168/78 (Commission v France [1980] ECR 347, paragraph 11 of the decision) the following factors were considered relevant:
(1)
common generic features such as distillation and a high alcohol content;
(2)
any particular characteristics in addition to those generic features (differences in the raw materials used, in the manufacturing processes or in the flavourings added) ;
(3)
the existence of products with generic features but with less distinct characteristics and wider uses (products derived from ‘neutral’ spirits and consumed in different forms, for instance either neat or diluted or mixed with other drinks). Evidently the issues involved in Cases 106 and 243/84 must be discussed in the light of those somewhat imprecise criteria for establishing similarity. In that regard the parties have reached different conclusions. Hence, as I remarked earlier, the Court may well have to define or supplement those criteria.
4.2. The concept of indirect protection in the second paragraph of Article 95
In the last paragraph on page 232 of its judgment in Case 27/67 (Fink-Frucht) the Court stated that indirect protection would occur if internal taxation were to impose a heavier burden on an imported product than on a domestic product with which the imported is, by reason of one or more economic uses to which it may be put, in competition, even though the condition of similarity for the purposes of the first paragraph of Article 95 is not fulfilled.
In Case 31/67 (Stier [1968] ECR 235) the Court added that in the absence of comparable domestic production it was not permissible to impose on imported products charges of such an amount ‘that the free movement of goods within the common market would be impeded as far as those products were concerned’, but that the taxation on imported products had no protective effect ‘when the rate of taxation remains within the general framework of the national system of taxation of which the tax in question is an integral part’ (paragraph 2 on p. 241 of the decision). Those findings may be of some importance in Case 243/84 since whisky at any rate falls within the general scope of the Danish tax system applicable to spirits.
4.3. Relationship between the first and second paragraphs of Article 95
In those of the aforesaid judgments which are most relevant in the cases under consideration there was no need ultimately for the Court to answer the question whether, and if so to what extent, the first or — to be precise — the second paragraph of Article 95 was applicable. Even if the second paragraph of Article 95 had been applicable, it was clear in those cases that the contested tax legislation was unequivocally protective in its effects. Accordingly in Case 319/81 (Commission v Italy [1983] ECR 601) the Court was content to state (in paragraph 17 of its decision) that:
‘As the products concerned are either similar to or in competition with one another — which brings them within the scope of the second paragraph of Article 95 — a criterion for the charging of higher taxation, such as designation of origin or provenance which by definition cannot ever be fulfilled by domestic products similar to or in competition with products imported from other Member States as described above, cannot be considered to be compatible with the prohibition of discrimination laid down in that provision. Such a system has the effect of excluding domestic products in advance from the heaviest taxation since they will never fulfil the conditions on which the higher rate is charged and it is entirely at the discretion of the national legislature, in choosing not to introduce a general system applicable to all spirits, to perpetuate that situation indefinitely regardless of similarities or differences in conditions of production, quality, price or competition between national products and those imported from other Member States.’
The exclusive application of the second paragraph of Article 95 was accepted by the Court only in its judgments of 27 February 1980 and 12 July 1983 in Case 170/78 (Commission v United Kingdom [1980] ECR 417 and [1983] ECR 2265). That case was, as is well known, concerned with differences in taxation between wine and beer, which are clearly not similar products. The Court deduced that the tax on wine had a protective effect from the substantial additional tax burden imposed on wine by reference to the volume (400%), the alcohol content (at least 100%) and the price (not exceeding 286% of the retail price excluding tax). That judgment underscores the fact that, unlike cases in which the first paragraph of Article 95 is applicable, a strictly identical rate of tax for domestic and imported products cannot be required in cases where the second paragraph of that article is applicable.
4.4. Permissibility of differential taxation
In the cases under consideration Denmark has also relied on the case-law of the Court concerning the permissibility of differential rates of tax. In that connection, the judgments of the Court in Case 148/77 (Hansen [1978] ECR 1787), Case 140/79 (Chemial Farmaceutici [1981] ECR 1), Case 46/80 (Vinal [1981] ECR 77) and Case 319/81 (Commission v Italy [1983] ECR 601) are of particular interest. In the Hansen case, as is well known, differential taxation which is intended to serve legitimate economic or social purposes, such as the use of certain raw materials, the continued production of particular spirits of high quality or the continuance of certain classes of undertakings such as agricultural distilleries, was held to be compatible in principle with Community law (paragraph 16 of the decision). In paragraph 17 of its decision in that case, however, the Court added that such preferential systems must, for the purposes of Article 95, be extended without discrimination to spirits coming from other Member States.
In Chemial Farmaceutici and Vinal, the Court added to those criteria the further conditions, worded in identical terms, that the economic policy objectives at issue in those cases must be ‘themselves compatible with the requirements of the Treaty and its secondary law’ and that the detailed rules which differentiate between products must be ‘such as to avoid any form of discrimination, direct or indirect in regard to imports from other Member States or any form of protection of competing domestic products.’ However, the Court considered that differential taxation such as that which exists in Italy for denatured synthetic alcohol on the one hand and denatured alcohol obtained by fermentation on the other satisfied those requirements. ‘It appears in fact that that system of taxation pursues an objective of legitimate industrial policy in that it is such as to promote the distillation of agricultural products as against the manufacture of alcohol from petroleum derivatives’ (paragraph 15 of the decision). According to the Court, there was no indirect protection of domestic production since, by reason of the taxation of synthetic alcohol, it had been impossible to develop profitable production of that type of alcohol on national territory (although it was in itself technicaly and economically feasible) (paragraph 18 of the decision).
In order to apply the Chemial Farmaceutici and Vinal judgments to Case 106/84 by analogy, it is important in my view in the first place to determine whether favourable treatment of certain domestic agricultural products (fruit) to the detriment of imported agricultural products (grapes) can be viewed in the same terms as favourable treatment of an agricultural product to the detriment of a nonagricultural product. In my view that question must be answered in the negative as a result of the common agricultural policy (optimum allocation of competing products and the prohibition of discrimination laid down by Article 40 (3)). Secondly, there is a clear distinction between Cases 140/79 and 46/80 on the one hand and Case 106/84 on the other inasmuch as synthetic alcohol can be produced in Italy but grape wine cannot be produced in Denmark. As regards Case 243/84, it is clear that the reasons for which scarcely any whisky is produced in Denmark have nothing to do with taxation.
Moreover, of particular importance in Case 243/84 is the question whether the application of a higher rate of tax for spirits than for liqueur wine can be justified on social grounds, such as the need to combat the consumption of a beverage with an alcohol content which is twice as high. In my view that question must in principle, in the light of the case-law of the Court, be answered in the affirmative, provided that the application of a higher rate has no discriminatory or protectionist effect.
4.5. Objectives of Article 95
The general objectives of Article 95 are variously described in the case-law of the Court. In Case 27/67 (Fink-Fmcht [1968] ECR 223) the purpose of that provision was described as to ensure normal conditions of competition and to remove all restrictions of a fiscal nature capable of hindering the free movement of goods within the common market.
According to paragraph 4 of the decision in Case 168/78, the provisions of the first and second paragraphs of Article 95 supplement the relevant provisions on the abolition of customs duties and charges having equivalent effect. Their aim is to ensure free movement of goods between the Member States in normal conditions of competition by the elimination of all forms of protection which result from the application of internal taxation which discriminates against products from other Member States. Article 95 must guarantee the complete neutrality of internal taxation as regards competition between domestic and imported products. The Court expressed itself in similar terms in its judgment in Case 216/81.
In paragraph 20 of its decision in Case 171/78 the Court explained the different objectives pursued by Article 95 and by the harmonization of tax legislation on the basis of Article 99. Whilst Article 95 aims to eliminate discrimination and protection resulting from a given national tax system, Article 99 aims to reduce trade barriers arising from the differences between the national tax systems. In my view, that definition is useful and it is also relevant to the cases under consideration. Contrary to the impression which may be conveyed by the wording used in Case 27/67, not all tax barriers to trade can be removed on the basis of Article 95.
The Court also pointed out in paragraph 20 that the implementation of the programme of harmonization provided for by Article 99 cannot constitute a preliminary to the application of Article 95. Those two explanations, viewed together, are of particular significance with regard to the assessment of Case 106/84.
To summarize, I infer from the case-law of the Court that the purpose of the first and second paragraphs of Article 95 is to eliminate certain kinds of tax barriers to trade that distort competition, namely barriers to trade which arise from discrimination against imported products and from protection of domestic products. In my view, that objective of Article 95 is also relevant for determining whether the products at issue are similar, within the meaning of the first paragraph of Article 95, or only competing, for the purposes of the second paragraph of Article 95, and for resolving the question whether there is discrimination or only protection for the purposes of those two paragraphs. Statistics on sales or other figures may in certain circumstances show that tax legislation which at first sight is discriminatory or protective has no such effect in practice.
5. Conclusion
5.1. Case 106/84
(a)
It is clear from my survey of the facts that grape wine of the table- wine type and grape wine of the liqueur type are taxed by a ratio of approximately 10:7 and 20:11 more heavily per litre than competing products made from other fruit. Moreover, it is clear that if such wines are to be regarded as similar products, there is discrimination contrary to the first paragraph of Article 95.
(b)
The Commission infers from the case-law of the Court which I have analysed (in particular Cases 168, 169 and 171/78) that fruit wine of the table-wine type and fruit wine of the liqueur type are similar to comparable types of wine made from grapes. According to the Commission, they display similar characteristics, meet the same needs, are invariably obtained by fermentation, have a similar alcohol content and are consumed in the same quantities. In its view, the fact that there is a difference in the raw materials used does not preclude similarity altogether, as I believe can also be inferred from the judgments of the Court of 27 February 1980 concerning spirits. Moreover, the Commission correctly deduces from those judgments that the Court no longer regards a different customs classification as an obstacle to recognition of similarity. In that regard I would refer once again to my analysis of the relevant case-law. Finally, it is also clear from my analysis of the case-law that the Commission was right to reject Denmark's contention that the Commission, owing to its protracted inactivity, forfeited the right to institute proceedings against the rules at issue. According to my analysis, Article 95 has another, albeit more limited, purpose than that of Article 99. If the far-reaching process of harmonization based on Article 99 grinds to a halt at Council level, the Commission is fully entitled to enforce the fundamental minimum requirements laid down by Article 95.
(c)
The Commission contends, but only in the alternative, that if the second paragraph of Article 95 is applicable, the Danish system in any event has a protective effect in favour of Danish products. That follows from the second judgment given by the Court in Case 170/78. The fact that the bulk of domestic production falls within the favourable tax category shows that the Danish system is not neutral. The Commission challenges Denmark's reliance on the Court's judgments in the Chemial Farmaceutici and Vinal cases on the ground that they were concerned with the promotion of the distillation of agricultural products. However, the Commission considers the preferential treatment of Danish fruit growers by comparison with wine producers from other Member States to be unlawful. In my analysis of those judgments I have come to the same conclusion.
(d)
Leaving aside those arguments which have already been rejected, the Danish Government contends in the first place that the legislation enacted by Denmark upon its accession abolished traditional discrimination against imported wine. In my view, that contention is correct, at least as regards fruit wine of the table-wine type, if a comparison is made between Danish fruit wine and imported fruit wine. However, in the case of fruit wine of the liqueur type there are certain questions in that regard to which I shall return when I consider Case 243/84.
Any similarity between wine made from grapes and wine made from other fruit is denied by the Danish Government on the grounds set out in part 2 of this Opinion. In my view, the main argument on which it relies is that, unlike wine made from grapes, wine made from other fruit is not covered by a common organization of the market. If the products at issue were similar, such a difference in treatment would be contrary to Article 40 (3). Nor, in the Danish Government's view, is there any protective effect for the purposes of the second paragraph of Article 95. The additional tax burden per litre of table wine is 55% in the case of table wine and 80% in the case of liqueur wine. The additional tax burden for grape wine of the liqueur type of an alcoholic strength of between 20% and 23% is approximately 170%, measured by the same yardstick. In terms of alcoholic strength, the additional tax burden varies from 60% to 135%. However, the share of the retail price represented by excise duty is approximately the same for both categories of products (less than 30% for table wine, 26% to 29% for fruit wine and 25% to 38% for inexpensive grape wine of the liqueur type as opposed to 25% to 38% for fruit wine of the liqueur type). Therefore it would appear that the Danish Government considers the incidence of tax, expressed in percentage terms, on retail prices to be conclusive evidence of the absence of a protective effect. Yet the other figures produced by it do point to a protective effect in the light of the Court's judgments in Case 170/78. As I stated in my Opinion in that case, however, I myself consider that the most important criterion for assessing the incidence of differential taxation on the competitive relationships between the products concerned is a comparison with the incidence of tax on the retail price.
(e)
Wine made from grapes and wine made from other fruit not only meet the same needs but exhibit so many common characteristics, in my view, that in the light of the objective criteria laid down by the Court they could at first sight be classified as similar products. However, since the rates of tax per litre are considerably higher for wine made from grapes than they are for wine made from other fruit, the first paragraph of Article 95 has clearly been infringed. In fact the Court has already held in paragraph 15 of its judgment in Case 45/75 (REWE [1976] ECR 181) that the first paragraph of Article 95 is infringed where the taxation on the imported product and that on the similar domestic product are calculated in a different manner on the basis of different criteria which lead, if only in certain cases, to higher taxation being imposed on the imported product. According to my analysis, however, the Court has always avoided a finding of similarity in the case of specific products and I share the view expressed by the Danish Government at the hearing that the average consumer probably does not regard grape wine of the table-wine type and fruit wine of the table-wine type as similar products. It may be otherwise if it is grape wine of the liqueur type and fruit wine of the liqueur type that are compared. In that regard it is characteristic, in my view, that at the hearing the Commission confined its observations exclusively to liqueur wine, whilst the Danish Government confined its remarks exclusively to table wine.
(f)
Objective doubts concerning the similarity between table wine made from grapes and table wine made from other fruit are in my view largely substantiated by the statistics set out in the introduction to this Opinion. They show, in the first place, that Danish fruit wine of the table-wine type is primarily in competition with similar imported fruit wine. The abolition of traditional discrimination seems to have led to a significant increase in sales of imported fruit wine following the accession of Denmark and, in particular, since 1976. Since 1978 and 1979, however, sales of domestic fruit wine have hardly increased at all, according to those figures. It is also apparent from those figures that the lower tax on fruit wine has not prevented an enormous increase in imports of wine made from grapes (which, moreover, continue to be over 30 times as high as consumption of fruit wine). I consider that, subject to proof to the contrary, which has not been furnished by the Commission, those figures show that grape wine of the table-wine type and fruit wine of the table-wine type are not in fact similar products (with the result that the first paragraph of Article 95 is inapplicable) and that in reality there is no protective effect in favour of fruit wine. In my view, in determining whether a competitive relationship exists under the second paragraph of Article 95, it is necessary — as is the case with regard to competition policy in general — to disregard negligible market shares such as those at issue in this case because they are of no significance. As I said earlier, however, it is also clear from the statistics that there is no essential cross-elasticity of demand between fruit wine of the table-wine type and grape wine of the table-wine type.
(g)
However, I take a different view as far as liqueur wine is concerned. In my preliminary remarks I have already pointed out that the statistics set out in the introduction seem to indicate clearly the existence of cross-elasticity of demand between fruit wine of the liqueur type and grape wine of the liqueur type. The sharp increase in consumption of fruit wine of the liqueur type since 1978 was accompanied over the same period by a marked decline in imports of grape wine of the liqueur type. The fact that consumption of fruit wine of the liqueur type and consumption of grape wine of the liqueur type (in sharp contrast to the figures for table wine) have steadily drawn level points to the conclusion that they are similar products.
The view that the products concerned are similar is supported not only by those statistical arguments but also by certain arguments concerning quality. Fruit wine of the liqueur type and grape wine of the liqueur type satisfy, to a greater extent than table wine, the twofold criterion established by the Court in its case-law: that is to say, they display similar characteristics and meet the same needs. Not only are they of comparable alcoholic strength but it has also been established in the course of the proceedings that certain kinds of fruit wine of the liqueur type are akin to vermouths and to Cinzano bitter. According to the criterion to which I have just referred and which was laid down by the Court in paragraph 15 of its judgment in Case 45/75, that finding is sufficient to bring into operation the first paragraph of Article 95. Moreover, since it is clear on the basis of my survey of the facts that the taxes charged on grape wine of the liqueur type and fruit wine of the liqueur type are calculated by different methods, at different rates and in accordance with different criteria, and that consequently imported grape wine of the liqueur type is taxed more heavily, I consider that the Commission's application is well founded with regard to liqueur wine. The fact that, according to the Danish Government, the tax expressed as a percentage of the retail price is of the same order cannot affect that conclusion, since the first paragraph of Article 95 is applicable. An incontrovertible difference in absolute terms in the rate of tax must be regarded as sufficient evidence of an infringement of the first paragraph of Article 95.
(h)
In conclusion, I suggest that the Court should:
(1)
declare the Commission's application well founded in so far as it concerns liqueur wine;
(2)
dismiss the remainder of the Commission's application;
(3)
order that the parties are to bear their own costs in accordance with Article 69 (3) of the Rules of Procedure since each of the parties has failed in an important submission.
5.2. Case 243/84
(a)
In Case 243/84 the Østre Landsret [Eastern Division of the High Court of Denmark] has referred the following questions to the Court of Justice for a preliminary ruling:
(1)
Must the first paragraph of Article 95 of the EEC Treaty be interpreted as meaning that Scotch whisky and fruit wine of the liqueur type, as described in the law in question and in the annex to the Østre Landsret's decision, are to be regarded as ‘similar... products’, the one being imported and the other of domestic origin, with the result that it is contrary to that provision to maintain tax rules whereby whisky, like other distilled spirits, is subject to a combined duty calculated partly on the basis of its alcohol content and partly on the basis of its price, whilst the tax on fruit wine (and wine made from grapes) is calculated solely in relation to the quantity of the beverage, where the tax rules result in a lower duty on fruit wine (and wine made from grapes) than on whisky, where those rules do not make a distinction on the basis of the beverages' country of origin, where no whisky is manufactured in the Member State concerned, but approximately three-quarters of the beverages consumed which are subject to the higher duty (that applicable to spirits) are of domestic origin, and where more than 99% of the fruit wine of the liqueur type consumed is of domestic origin?
(2)
Must the second paragraph of Article 95 be interpreted as meaning that in the circumstances set out in Question 1 a comparison between the duties on scotch whisky and on fruit wine of the liqueur type should be undertaken? If so, is it contrary to that provision if the duties, considered in relation to the beverage's price, quantity and alcohol content, are as described in the annex to the Østre Landsret's decision?
(3)
For the purpose of answering Questions 1 and 2 is it relevant that the historical basis for the rules on the taxation of fruit wine is a desire to provide fruit growers who work in difficult climatic conditions with a wider market for their produce?
(b)
For the arguments put forward by the parties in their written observations, I would refer the Court to part 3 of this Opinion.
John Walker laid even greater emphasis at the hearing than in its written observations on the fact that its objections were directed less at the relationship between the system of taxation applicable to spirits and the system of taxation applicable to fruit wine of the liqueur type than at the latter system as such. John Walker takes exception to that system inasmuch as it also treats as fruit-based iiqueur wine beverages in respect of which only 5% of the alcohol content is obtained by fermentation of fruit juices and the remaining 95% consists of added alcohol. Fruit wine of the liqueur type which has that composition should in its view be regarded as similar to spirits. Consequently, at the hearing John Walker argued primarily in favour of amending the definition of fruit wine of the liqueur type so as to ensure that products which are not similar to ordinary liqueur wine (but resemble certain spirits) can no longer qualify for the much lower rate of tax applied to fruit wine of the liqueur type. By way of illustration, John Walker referred in particular to two kinds of fruit wine of the liqueur type (Longo and Gringo) which, as regards their colour, flavour, alcohol content and manner of consumption are undoubtedly similar to Campari, which, however, on account of its somewhat higher alcohol content, is taxed at the same rate as spirits. The Danish Government seemed to acknowledge at the hearing that there was a problem in the case of Campari. However, as regards whisky, the product with which the questions submitted by the national court are concerned, that example does not seem to be of decisive importance for the following reasons:
The definition of fruit wine of the liqueur type would appear to be a weak point in the Danish legislation. The competitive relationship with liqueurs made from the same fruit and taxed at the same rate as spirits seems to be at least as important as, if not more important than the competitive relationship with fruit wine of the liqueur type made from other fruit not only for fruit wine of the liqueur type such as Campari but also for the more common cherry liqueurs and possibly for other kinds of fruit wine of the liqueur type with a high percentage of added alcohol. That clearly seems to be the case in so far as the beverages concerned are generally consumed after being diluted with water or soda water, a practice which is also recommended for certain kinds of fruit wine of the liqueur type, as is apparent from the documents before the Court.
John Walker's contention that the virtual absence of imports of fruit wine of the liqueur type is the result of the fact that wine of that kind is classified as spirits in other Member States because of its high content of added alcohol is, in my view, more plausible than the Danish Government's contention that Danish fruit wine of the liqueur type is of a higher quality. John Walker's argument is also supported by the Commission's proposals for harmoniration which were notified during the proceedings and which provide for a much higher content of fermented alcohol as a prerequisite for classification as liqueur wine.
In that regard, only a comparative survey of the tax arrangements in force in the various Member States as regards fruit wine of the liqueur type can provide a definitive answer. However, since the questions submitted by the national court are not concerned with the arrangements applicable to fruit wine of the liqueur type as such, I consider that the existence or otherwise of discrimination against imported products under the system applicable to fruit wine of the liqueur type is, in the final analysis, irrelevant in the present case. Accordingly, the Court need not deal with that aspect of the case in these proceedings. Should the Court decide to adopt the conclusion which I have reached in Case 106/84, the system applicable to liqueur wine will in any event need to be reviewed.
(c)
Although in certain circumstances whisky may meet the same needs as certain kinds of fruit wine of the liqueur type, it does not in my view satisfy the other main criterion laid down by the Court as regards the concept of similarity. It is impossible in my view to argue that whisky exhibits the same characteristics as liqueur wine. There are too many differences between the raw materials used (fruit as opposed to cereals), in the methods of manufacture (partial fermentation as opposed to distillation alone) and, in particular, as regards the alcohol content of the products when they are sold by retail (the stage of comparison in the manufacturing and distribution process selected by John Walker). According to the figures submitted, the alcohol content of whisky is approximately twice as high as the alcohol content of the liqueur wines referred to by John Walker during the proceedings.
(d)
Since the rate of tax for spirits, according to my earlier survey of the facts, is substantially higher than the rate of tax for fruit wine of the liqueur type, the rate of tax for spirits seems at first sight to have a protective effect within the meaning of the second paragraph of Article 95. In its written observations (in particular on pp. 14 and 15 and pp. 49 and 50) John Walker calculated that the protective effect was equivalent to a 160% tax on the retail price of whisky excluding tax, as against a 50% tax on the retail price of liqueur wine excluding tax. As regards those calculations it must be pointed out that they also include the difference between the value- added tax on spirits and the value-added tax on liqueur wine. However, the questions submitted by the national court are not concerned with that point. If the effect of value-added tax is excluded, the difference amounts to 100% as against 50%. Spirits are therefore taxed twice as heavily as fruit wine of the liqueur type, which corresponds to the difference in alcohol content.
For that reason and also having regard to the Court's judgment in Case 170/78, I consider that the plaintiff has failed to establish that the rate of tax for whisky has a protective effect. However, a number of other factors need to be considered, none of which bears out the existence of a protective effect.
In the first place, that rate of tax applies with equal severity to domestic production of spirits and to imported spirits. Domestic production is, however, far more significant than the volume of imports, as is clear from the statistics referred to earlier. Secondly, those statistics show that domestic production of spirits is also far more significant than domestic production of fruit wine of the liqueur type, with the result that on balance it is impossible to speak of the protection of Denmark's domestic production as a whole but at most only of the protection of its domestic production of fruit wine of the liqueur type. In my view, that finding is also relevant for the application of the second paragraph of Article 95 in cases in which internal taxation primarily and directly affects imports and, according to the same criteria, a substantial proportion of domestic production. Thirdly, the statistics do not reveal extensive protection of domestic production of fruit wine of the liqueur type. They show that imports of spirits have steadily increased since the Court's 1981 judgment in this area. According to Annex IV to the answer given by the Danish Government to the questions put to it by the Court, that also holds true for whisky. Moroever, imports of spirits, according to those statistics, are approximately equal in volume to consumption of fruit wine of the liqueur type and only the figures for 1983 and 1984 indicate, for spirits in general (but not for whisky), a possible connection between the fall in imports of spirits and the growth in sales of fruit wine of the liqueur type. In this case, however, which is concerned exclusively with whisky, a more detailed investigation of that connection seems unnecessary.
(e)
With regard to ‘Johnny Walker’ in particular, it is apparent from Annex IV to the Danish Goverment's answer that imports of this brand have steadily declined since 1975 and also since the Court's 1980 judgment in this area. In my view, the argument put forward by John Walker at the hearing to the effect that the decline was the result of the ad valorem factor in the Danish tax legislation which, as I pointed out in the first part of my Opinion, is extremely high, may well be correct. In that regard, however, it is possible at most to speak of discrimination as between different kinds of imported whisky, which I do not consider to be relevant either for the purposes of the application of the second paragraph of Article 95 or for the answer to be given to the questions submitted by the national court. The Østre Landsret has not submitted any questions either on that point or in connection with the existence of discrimination, alleged by John Walker, against whisky in general as opposed to aquavit which is cheaper, as a result of the high ad valorem component of the tax on spirits.
(f)
Even if the higher tax on spirits has a protective effect, the higher rate may in my view be justified by legitimate social purposes, as indicated by the Court in paragraph 16 of its judgment in Case 148/77 {Hansen). That brings to mind, in particular, the argument put forward by the Danish Government to the effect that consumption of beverages with the highest alcohol content must be curtailed. As I pointed out earlier, the effect of curtailing consumption viewed as a whole (and in the light of the figures supplied by John Walker), is wholly proportionate to the high alcohol content and cannot therefore be treated as excessive in relation to whisky. Hence the question of the extent to which a disproportionately higher tax on spirits (expressed as a percentage of the retail price excluding tax) can be justified by social purposes of that kind may be disregarded in this case.
(g)
As regards the third question submitted by the national court, the Danish Government cannot in my view rely on the judgments given by the Court in 1981 in Chemial Farmaceutici and Vinal, for the reasons which I have already given in my analysis of those judgments. In the light of those judgments and of the principles of the common agricultural policy, indirect protection of domestically-produced agricultural products to the detriment of agricultural products manufactured in other Member States by means of differential taxation of the alcoholic beverages derived from those products cannot be justified. However, for the reasons which I gave earlier, I consider that aspect to be relevant with regard to the difference in taxation between fruit wine of the liqueur type and grape wine of the liqueur type but not with regard to the difference in taxation between whisky and fruit wine of the liqueur type.
(h)
In conclusion, I suggest that the Court should answer the questions submitted by the national court as follows:
(1)
The first paragraph of Article 95 of the EEC Treaty must be interpreted as meaning that Scotch whisky and fruit wine of the liqueur type, as described in the Danish law in question and in the annex to the national court's decision, are not to be regarded as similar products for the purposes of that provision.
(2)
The second paragraph of Article 95 of the EEC Treaty must be interpreted as meaning that, in the circumstances set out in Question 1, a comparison between a specific consumer tax on Scotch whisky and a specific consumer tax on fruit wine of the liqueur type may be relevant, but that there is no breach of that provision if the ratio between those specific consumer taxes in relation to the retail price of the beverages concerned excluding tax is approximately the same as the ratio between the alcoholic strengths of those beverages.
(3)
The desire to provide fruit growers who are faced with difficult marketing conditions with a wider market for their produce is not sufficient to justify the adoption of discriminatory or protective measures against competing agricultural products manufactured primarily or exclusively in other Member States or against beverages manufactured from such products. This finding cannot, however, lead to any other conclusion for the purposes of the answer to Questions 1 and 2.
( *1 ) Translated from the Dutch.
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