OPINION OF ADVOCATE GENERAL

delivered on 8 May 2003 (1)

(Failure to fulfil obligations – Article 2(2) of Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on mineral oils – Use as fuel – National legislation providing for exemption for certain uses not considered to constitute intended use as fuel (Mineralölsteuergesetz, Paragraph 4(1)(2)(b), and Erlass des Bundesministers der Finanzen of 2 February 1998, III A 1 – V 0355 – 10/97)

I – Introduction

1.In this case, under Article 226 EC, the Commission seeks a declaration by the Court that, by applying Paragraph 4(1)(2)(b) of the Mineralölsteuergesetz, the Federal Republic of Germany has failed to fulfil its obligations under Article 2(2) of Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on mineral oils (2) since it has not made subject to excise duty all mineral oils intended for use as fuel.

II – Legislative background

A – Community law

‘Whereas, in order to ensure the establishment and functioning of the internal market, chargeability of excise duties should be identical in all the Member States’.

‘This directive shall apply at Community level to the following products as defined in the relevant directives:

–mineral oils,

5. The specific directives which, in accordance with Article 1(2) of Directive 92/12, have been adopted with regard to mineral oils are Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on mineral oils (‘Directive 92/81’) and Council Directive 92/82/EEC of 19 October 1992 on the approximation of the rates of excise duties on mineral oils (4) (‘Directive 92/82’).

6. According to the third recital in the preamble to Directive 92/81, ‘it is important to the proper functioning of the internal market to determine common definitions for all mineral oil products which are to be subject to the general excise monitoring system’.

7. Article 1(1) and (2) of Directive 92/81 provides:

‘1. Member States shall impose a harmonised excise duty on mineral oils in accordance with this directive.

‘Mineral oils other than those for which a level of duty is specified in the rates Directive 92/82/EEC shall be subject to excise duty if intended for use, offered for sale or used as heating fuel or motor fuel. The rate of duty to be charged shall be fixed, according to use, at the rate for the equivalent heating fuel or motor fuel.’

‘1. In addition to the general provisions set out in Directive 92/12/EEC on exempt uses of excisable products, and without prejudice to other Community provisions, Member States shall exempt the following from the harmonised excise duty under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any evasion, avoidance or abuse:

(d) mineral oils injected into blast furnaces for the purposes of chemical reduction as an addition to the coke used as the principal fuel.’

10. According to the 18th recital in the preamble to Directive 94/74, by which point (d) was added to Article 8(1) of Directive 92/81, it is necessary to grant compulsory exemption at Community level for mineral oils injected into blast furnaces for chemical reduction purposes in order to prevent distortions of competition arising from different taxation arrangements in Member States.

B – National law

11. The national legislation at issue in this case is the Mineralölsteuergesetz (Law on the Taxation of Mineral Oils) of 21 December 1992 (6) (‘the MinöStG’), last amended by the Agrardieselgesetz (Law on Agricultural Diesel) of 21 December 2000. (7)

12. Paragraph 4 of the MinöStG, entitled ‘Exemptions, definitions’, provides:

‘(1) Subject to the provisions of Paragraph 12, mineral oil may be used with exemption from tax

(a) use as motor fuel or the production of motor fuel,

(b) use as heating fuel (“Verheizen”),

(c) driving gas turbines;

13. The detailed rules for the application of Paragraph 4(1)(2) of the MinöStG are set out more fully in a circular (Erlass) of 2 February 1998 (8) (‘the circular’).

14. That circular explains in more detail, on the basis of principles developed in the case-law of the Bundesfinanzhof (Federal Finance Court), the meaning of the term ‘Verheizen’ (‘use as heating fuel’) for the purposes of Paragraph 4(1)(2) of the MinöStG. Under point II of the circular, such use arises where the following criteria are satisfied:

– the use of mineral oil as heating fuel (‘zum Verheizen’) is the production of thermal energy;

– ‘use as heating fuel’ is the intentional use of the calorific value of a substance, that is to say, the (total or partial) combustion of mineral oil for the production of heat which is (totally or partially) transferred to another substance, in which process the production of heat and the transfer of that heat must not be of merely secondary importance as compared with other purposes for which the mineral oil is used;

– the substance to which the heat is transferred must acquire the character of a new energy or heat source (‘Heizmittel’);

– the actual use of the new heat source as a heating medium (‘Heizmittel’) justifies the conclusion that the mineral oil used to produce that heat source has been used as fuel.

It follows that the decisive factor when determining whether ‘use as heating fuel’ (‘Verheizen’) has taken place is the method of heat transfer. The following are given as examples of heat sources (heating media): hot water and steam (as in the case of space heaters), heated ambient air, combustion gases (flue gas), boilers, jackets, etc.

15. With regard to the use of mineral oil for energy, under the case-law of the Bundesfinanzhof it may be assumed that no ‘use as heating fuel’ has taken place only in the following cases (point III of the circular):

– The flame comes into direct contact with the substance to be treated, worked or destroyed. The examples mentioned include singeing off textile fibres, heating up metals to make them workable, and warming up roofing felt to make it easier to handle.

– The substance absorbing the combustion energy is itself subjected to heat in order to serve in the manufacture of a product of a different nature and thereby loses its inherent physical and chemical properties. Material alteration means that constituents of the mineral oil are at least partly incorporated in the product, as in the production of soot by thermal cracking or in the hardening of steel by the process known as cementation. Here too, mineral oil is used at least partly as a raw material, and a chemical alteration of the molecular structure takes place. A decisive indication that such is the case may, for example, be that the use of another energy source, such as coal or electricity, cannot fulfil the production objective.

– There is no utilisation of the calorific value of mineral oils used to produce heat where the principal objective is the elimination of harmful gas emissions by means of their total combustion and for that purpose a pilot light is fuelled by mineral oil or mineral oil is mixed together in a combustion chamber with the gases to be eliminated and is completely burnt up.

– These cases have in common the fact that the combustion of the mineral oil coincides, in a homogeneous process, with the transformation or destruction of the substance absorbing the thermal energy. Transfer of the absorbed energy to another substance is therefore impossible.

III – Procedure

16. By letter of 26 May 1999, the Commission informed the Federal Republic of Germany, under Article 226 EC, that the interpretation of the term ‘use as heating fuel’ (‘Verheizen’) given in the circular was not, in its view, consistent with the first sentence of Article 2(2) of Directive 92/81. As a consequence of that interpretation, not all mineral oils used as heating fuel were made subject to excise duty.

17. After the expiry of the period laid down in that letter of formal notice, the German Government replied, by letter of 13 October 1999, that, due to the lack of a definition of the phrase ‘use ... as heating fuel’ (‘Verbrauch als Heizstoff’) contained in the first sentence of Article 2(2) of the directive, it was for the Member States to specify the meaning of that phrase. The interpretation given to ‘use as heating fuel’ (‘Verheizen’) in Germany was based on the case-law of the Bundesfinanzhof. The circular reflected that interpretation. The interpretation of the term ‘use as heating fuel’ (‘Verheizen’) applied in Germany had therefore tended to diverge from the original meaning of the term and from long-standing administrative practice. The German Government also asked the Commission to examine this problem in more general terms, taking into account practice in the other Member States, in order to reach a clear and common solution.

18. On 13 March 2000 the Commission sent a reasoned opinion to the Federal Republic of Germany, reiterating its arguments from the letter of formal notice and adding that the fact that other Member States gave their own interpretations to the phrase ‘use ... as heating fuel’ did not entitle the Federal Republic of Germany to define that phrase in a manner which conflicted with Community law.

19. After the Federal Republic of Germany failed to take steps within the period laid down in the reasoned opinion to put an end to the breach of Community law found by the Commission, by application of 18 June 2001, the Commission brought the present action.

21. The parties explained their points of view at the hearing of the Court on 27 February 2003.

IV – Pleas in law and main arguments

22. The main arguments submitted by the Commission and by the German Government can be summarised as follows.

A – The Commission’s point of view

23. The main issue to which the Commission draws attention is that under Paragraph 4(1)(2)(b) of the MinöStG, as interpreted by the circular, mineral oils may in certain cases be used as heating fuel without being subject to excise duty.

25. According to that interpretation, the term ‘use as heating fuel’ (‘Verheizen’) refers exclusively to the indirect use of mineral oil as an energy source, namely as a means of generating a heat source which will serve to provide heat, as, for example, in an oil-fired domestic heating system. This means that the use of the thermal energy of mineral oil to initiate and maintain industrial processes is not covered by that term. In the Commission’s view, by applying Paragraph 4(1)(2)(b) of the MinöStG in accordance with that interpretation, the Federal Republic of Germany is in breach of Directive 92/81.

26. Even though Article 2(2) of Directive 92/81 does not contain a formal definition of ‘use ... as heating fuel’, it follows from the objective of harmonisation that the excise duty directives are aimed at ensuring that the term is interpreted independently. The third recital in the preamble to Directive 92/81 and the third recital in the preamble to Directive 92/12 also point to the need for such an independent and uniform interpretation.

27. To substantiate that view, the Commission refers to the judgment in Stichting ‘Goed Wonen’, (9) from which it is clear, in particular, that the VAT exemptions provided for in the Sixth Directive (10) must be based on independent concepts of Community law. The principle on which that finding by the Court is based can also be applied to Directive 92/81. That finding applies a fortiori to any concept which is determinative of the scope of a provision which serves as the basis for levying a tax. The lack of a definition of the phrase ‘use ... as heating fuel’ does not in any event mean that the Community legislature intended to leave the more exact specification of the content of that concept to the Member States. If the definition of the concept were to take place in the fifteen national legal orders, that could undermine the objective of harmonisation pursued by Directive 92/81.

28. The Commission is of the opinion that the strict interpretation of the aforementioned concept which is applied in Germany does not follow from the wording of Directive 92/81. According to the usual interpretation of the term ‘Verheizen’ used in Paragraph 4(1)(2)(b) of the MinöStG, mineral oils are always ‘used’ when they are burnt and the heat thus produced is used for heating, whatever the ultimate purpose of that heating may be. Consequently, the heat produced by the combustion may equally serve either to heat a building by means of a heating installation, or to initiate chemical processes where the mineral oil is not only a heat source but where its constituents are also partly incorporated into the final product. That view is supported by the English and French language versions of Directive 92/81, in which the expressions ‘used as heating fuel’ and ‘utilisées comme combustible’ are used respectively.

29. The Commission also points out that the German Government acknowledged in its reply of 13 October 1999 to the Commission’s letter of formal notice that the interpretation of the term ‘use as heating fuel’ (‘Verheizen’) applied in Germany, which is based on the case-law of the Bundesfinanzhof as reflected in the circular, has since departed from the true meaning of the term and from long-standing administrative practice.

30. Support for the view that ‘use ... as heating fuel’ must be interpreted broadly can also be inferred from the scheme of Directive 92/81. Thus the Commission points out that under Article 8(1)(d) of Directive 92/81 mineral oils injected into blast furnaces for the purposes of chemical reduction as an addition to the coke used as the principal fuel are to be exempted from the harmonised excise duty. In that specific case, the mineral oils used are burnt, while the heat thus generated is used for the proposed chemical reduction. The fact that the Community legislature exempted the case referred to in Article 8(1)(d) from excise duty clearly shows that it assumes that the first sentence of Article 2(2) of Directive 92/81 covers all forms of use of mineral oils for the production of thermal energy. In other words, the addition of point (d) to Article 8(1) of Directive 92/81 would have made little sense if the phrase ‘use ... as heating fuel’ were restricted, along the lines of the circular, to cases where the thermal energy produced is transferred to another substance which in turn serves as a heat source.

31. Consequently, any industrial use of the calorific value of mineral oils, which is comparable to the abovementioned application in blast furnaces and is not covered by the exemption provided for in Article 8(1)(d) of Directive 92/81, is taxable under the first sentence of Article 2(2) of Directive 92/81. The derogation provided for in Article 8(1)(d) of Directive 92/81 is not such as to justify all the exceptions to the obligation to levy duty which are provided for in point III of the circular. The examples mentioned in point III of that circular are not covered by the particular case referred to in Article 8(1)(d) of Directive 92/81.

32. The Commission does not share the German Government’s view that Article 8(1)(d) of Directive 92/81 is intended purely as clarification. Referring to the 18th recital in the preamble to Directive 94/74, it points out that it was the intention of the Community legislature to create an entirely new exemption. That shows that the Community legislature assumed that the first sentence of Article 2(2) refers to any use of mineral oil for the production of thermal energy.

33. The Commission further points out that derogations such as those provided for in Article 8(1) of Directive 92/81 must be interpreted strictly. On this point, the Commission refers to the judgment of the Court in Stichting Uitvoering Financiële Acties (11) concerning Article 13 of the Sixth Directive, in which the Court held that the terms used to specify the exemptions envisaged by Article 13 of the Sixth Directive are to be interpreted strictly since they constitute exceptions to the general principle that turnover tax is levied on all services supplied for consideration by a taxable person. (12) The Commission is of the opinion that that interpretation must be applied in the same way to the exemptions provided for in Article 8(1)(d) of Directive 92/81.

34. On the other hand, the basic rule contained in Article 2(2) of that directive must be interpreted broadly so that it covers, in general terms, the use of mineral oils for the production of heat, that is to say, the use of the calorific value of mineral oils. It is not relevant in that regard whether the heat produced is used to heat an object or to initiate a chemical or industrial process. However, the interpretation of ‘use ... as heating fuel’ under the circular has the effect that many taxable mineral oils avoid excise duty.

B – The German Government’s point of view

35. The German Government is of the opinion that the manner in which the Commission interprets ‘intended for use ... as heating fuel’ or ‘use as heating fuel’ is not consistent with Directive 92/81. In particular, that applies to the grammatical interpretation of the terms in question, the nature of the harmonisation, the background to Directive 92/81 and the manner in which derogations must be interpreted.

36. In the German Government’s view, the Commission wrongly assumes that ‘combustion’ (‘Verbrennen’) and ‘use as heating fuel’ (‘Verheizen’) ultimately lead to the same result. In normal German usage, ‘use as heating fuel’ (‘Verheizen’) means only the indirect utilisation of an energy source. Although in the case of combustion heat is always produced, the use of mineral oil as heating fuel and therefore the obligation to pay excise duty apply only when, viewed objectively, the heat produced is transferred to another substance which is heated up, and, viewed subjectively, it is specifically intended that the heat be transferred to that other substance. The terms ‘intended for’ and ‘offered for sale’ in the first sentence of Article 2(2) of Directive 92/81 also point to that subjective intention. If that subjective element is lacking, it cannot be assumed that the mineral oil has been used as heating fuel, even if other substances are heated up as a consequence of the release of heat during a combustion process. That is the interpretation which is applied in the case-law of the Bundesfinanzhof and which is embodied in the second indent of point II of the circular.

37. With regard to the use of the thermal energy of mineral oil for the initiation and maintenance of industrial processes, the German Government points out that, contrary to what the Commission maintains, only the cases specified in point III of the circular are not regarded as ‘use as heating fuel’ (‘Verheizen’). Apart from those cases, there is no exemption from tax.

38. The German Government disputes that the concepts in Directive 92/81 must be interpreted independently. In its opinion, the third recital in the preamble to Directive 92/81 does not require a uniform interpretation of all the concepts used in the directive, as argued by the Commission. That recital is, rather, a reference to the first indent of Article 3(1) of Directive 92/12, under which mineral oils would be defined in the relevant directive, namely Directive 92/81. That took place in Article 2(1) of Directive 92/81, which lists the products regarded as mineral oils for the purposes of the directive. All those mineral oils are subject to the general regime of the excise duty directives, even where they are exempt, under certain conditions, from the duty on mineral oils.

39. If the Community legislature had intended the third recital in the preamble to Directive 92/81 to have the meaning attributed to it by the Commission, it would have defined ‘use ... as heating fuel’ in that directive itself. The fact that it did not do so, even though it was aware of the interpretation given to that concept in the Federal Republic of Germany, shows that it accepted that interpretation and that it did not opt for a uniform definition on this point. It was not, according to the law in force, the intention of the Community legislature to harmonise the concept of ‘heating fuel’, even though that may be desirable according to the law which should be adopted. In that situation, that concept must therefore be defined at national level.

41. The interpretation supported by the Commission presupposes that there is full harmonisation both in the field of mineral oil taxation and in the legislation governing turnover taxes. Directive 92/81 does not provide for such a degree of harmonisation with regard to mineral oils. That is clear from the wording of Directive 92/12.

42. In the German Government’s view, the genesis of Directive 92/81 constitutes a further argument against a uniform definition of the terms ‘Heizzweck’ (‘fin de chauffage’) and ‘Bestimmung als Heizstoff’ (‘destination comme combustible’) in all the Member States. The explanatory memorandum to the Commission’s proposal (13) which led to Directive 92/81 indicates that the intended harmonisation was restricted to that which was strictly necessary to eliminate frontier controls in the internal market. The aim was merely to effect sufficient coordination to ensure that, broadly speaking, similar products were taxed in a similar way and that differences attributable to tax in the final price of those products did not encourage fraudulent or artificial purchases. Within that framework, the Member States retained a considerable margin of discretion, even though that entailed allowing differences in the conditions of competition at national level to remain.

43. The German Government considers ill-founded the Commission’s argument that the addition of point (d) to Article 8(1) of Directive 92/81 demonstrates that the first sentence of Article 2(2) must be interpreted broadly. The German interpretation also acknowledges that, where mineral oils are injected into blast furnaces for the purpose of accelerating chemical reduction, part of the mineral oil is used as heating fuel. Rather, that provision is clarification of the fact that the industrial use in question is not covered by Article 2(2). In those circumstances, it cannot be concluded a contrario that any use of mineral oils to produce thermal energy means that the mineral oils in question have been ‘used as heating fuel’ within the meaning of the first sentence of Article 2(2) of that directive.

44. The German Government is further of the opinion that the exemptions under Article 8(1) of Directive 92/81 should not be interpreted strictly. In particular, it does not share the Commission’s view that the Court’s case-law on the interpretation of the scope of turnover tax exemptions can be applied to the exemptions in force in the field of excise duties. In contrast to the turnover tax field, harmonisation in the field of mineral oil taxation has remained limited to what is strictly necessary for the establishment and functioning of the internal market.

45. According to the German Government, the need for complete and independent definitions in the turnover tax field is based primarily on the Community’s financing needs and on the equitable distribution of financial burdens among the Member States. The directives on mineral oil taxation have no such dual function, since the Community receives nothing from the yield of these special excise duties and their basis does not serve as a basis for any transfer of financial resources whatsoever. The decisive argument in favour of the need for uniform definitions in relation to turnover tax does not apply in the case of mineral oil taxation.

V – Assessment

46. Under the first sentence of Article 2(2) of Directive 92/81, mineral oils which are used as heating fuel are to be subject to excise duty. The issue is when such use arises. The disagreement between the Commission and the Federal Republic of Germany is most acute on the question whether certain types of use in the context of industrial processes are to be regarded as ‘use ... as heating fuel’ within the meaning of the aforementioned provision of the directive. Put briefly, the Commission interprets that phrase as meaning that all use of mineral oil is subject to excise duty, irrespective of the purpose. The Federal Republic of Germany, on the other hand, in line with the principles developed by the Bundesfinanzhof and embodied in the circular, interprets that phrase more restrictively. According to that interpretation, use of mineral oil as heating fuel arises only when the mineral oil is used indirectly for heating purposes. In the German Government’s view, direct contact between the burnt oil and another substance is not covered by that phrase.

47. Whether excise duty is payable on the use of mineral oil in the industrial applications in question depends on the definition of ‘use ... as heating fuel’. In view of the effect on the cost price of levying that tax, it is clear that considerable economic implications will arise from the answer to a seemingly rather technical question regarding the meaning of the phrase ‘use ... as heating fuel’.

48. On closer consideration, I find that, from an analytical point of view, that answer must be given in two stages. The question first is whether that phrase must be interpreted independently and uniformly for the Community as a whole (as argued by the Commission) or whether it must be assumed that it has been left to the Member States to define it (the point of view of the Federal Republic of Germany). If it is held that this is a Community concept and therefore requires a uniform interpretation, the question then arises as to the precise meaning of that concept.

49. With regard to the first question, it must first be noted that Directives 92/12 and 92/81 are both based on Article 99 of the EC Treaty (now Article 93 EC), which is intended to harmonise national legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent necessary to ensure the establishment and functioning of the internal market. In other words, the intention is to eliminate both any barriers to the free movement of goods and services which are connected with such taxation and any differences in national legislation governing indirect taxation which may distort competition on the internal market.

50. Both those aims are also expressed in the recitals in the preambles to both directives. Thus the preamble to Directive 92/12 states that the establishment and functioning of the internal market also require the free movement of goods subject to excise duties and that, therefore, chargeability of excise duties should be identical in all the Member States. (14) The preamble to Directive 92/81 adds that it is important to the proper functioning of the internal market to determine common definitions for all mineral oil products which are to be subject to the general excise monitoring system. (15) In addition, with regard to the optional exemptions from excise duty for mineral oil permitted by Directive 92/81, these are made subject to the precondition that they do not give rise to distortions of competition. (16) Finally, the preamble to Directive 94/74 explains the inclusion of an exemption for the use of mineral oil for purposes of chemical reduction in blast furnaces by the need to prevent distortions of competition arising from different taxation arrangements in Member States. (17)

51. The question whether ‘use ... as heating fuel’ is a Community concept, and thus whether Member States are permitted to legislate in that regard, raises the issue of the nature and extent of the harmonisation envisaged by the directives in the field of excise duties on mineral oils. The Commission does not explicitly comment on this matter, but merely submits as part of its argument that the need for a uniform interpretation follows from the objective of harmonisation pursued by the directives. The German Government, on the other hand, which infers from that submission that the Commission considers that full harmonisation has been achieved in this field, takes the view that the harmonisation which has been achieved is only partial. To substantiate its view, it refers to the genesis of Directive 92/81, which shows that harmonisation in this field is limited to what is strictly necessary for the purpose of eliminating frontier controls in the internal market and that the Member States retain a considerable margin of discretion in that respect, even if that entails allowing differences in conditions of competition at national level to remain.

52. Although it must be conceded that the German Government is correct in saying that the harmonisation achieved in the field of excise duties on mineral oils is not complete, (18) in my opinion that does not mean that the Member States have simply retained the freedom to define the concepts used in those directives. The fact that the harmonisation achieved is of limited character cannot deprive the provisions of a directive of their effectiveness. (19) In its case-law on Directive 92/12, the Court has pointed out that the rules introduced by that directive with regard to the holding, movement and monitoring of products subject to excise duty are intended in particular to ensure that chargeability of excise duties is identical in all the Member States. (20) That objective of the excise duty directives necessarily implies that the provisions which form the basis of the duty concerned must be interpreted uniformly. The Member States are therefore not free to define more precisely the concepts used in those directives.

53. The purpose of the directives, which is to prevent distortions of competition, and thus also to bring about a level playing field in sectors of economic activity where excise duties are levied, suggests that the basis of taxation should be as uniform as possible. A uniform tax base creates the necessary transparency for fair and open competition. (21) Even though the rates charged in the various Member States may differ above the minimum amounts prescribed in Directive 92/82, it is clear that those differences are attributable solely to that fact.

54. The Community legislature has also given expression to that principle of uniform interpretation and application in the scheme of Directive 92/81. I refer here in particular to the relationship between the tax base (Article 2) and the exemptions from excise duty (Article 8), which are governed entirely by the directive. Those exemptions are divided into three categories: mandatory exemptions (Article 8(1)), optional exemptions (Article 8(2) and (3)) and other exemptions which may be introduced in accordance with a Community procedure (Article 8(4)). That system of exemptions, and therefore the effectiveness of the excise duty directives, could be undermined if Member States were free, by means of their own restrictive definitions of the concepts used in the directive, to permit excisable products or their use to avoid excise duty, thus achieving the same result as an exemption.

55. It therefore follows from the foregoing that the phrase ‘use ... as heating fuel’ in the first sentence of Article 2(2) of Directive 92/81 must be interpreted independently and uniformly for the Community as a whole.

56. That brings me to the actual meaning of the phrase. In this connection, the Commission and the German Government put forward arguments based on the wording, scheme and purpose of the provision.

57. So far as the grammatical approach is concerned, the Commission and the German Government examine at length the meaning of the terms ‘Verheizen’ and ‘Verbrennen’ in normal German linguistic usage. The Commission argues in essence that any use of a mineral oil for heating purposes, including industrial applications, falls within the scope of the first sentence of Article 2(2) of Directive 92/81. In contrast, according to the German understanding as embodied in the circular, certain types of use of mineral oil in the industrial sphere are not covered by ‘use as heating fuel’ (‘Verheizen’). In particular, those are applications in which substances are directly exposed to the flame and in which there is no transfer of heat. The German approach – referring to the fact that the first sentence of Article 2(2) of Directive 92/81 contains the words ‘intended for’ – also emphasises the subjective intention to use the mineral oil for a heating purpose.

58. In the pleadings exchanged, moreover, it was observed by the German Government, and subsequently emphasised by the Commission, that the meaning which is assigned to those words in the circular has shifted away from normal German usage. In any event, it is extremely questionable whether, under that textual approach based on the meaning of the words concerned in the German language, a legally useful definition of ‘use ... as heating fuel’ can be given. (22) The meaning must instead be determined on the basis of the function of the phrase within the legislation as a whole and in the light of the objective pursued by that legislation.

59. With regard to the purpose of Directive 92/81, the Commission draws attention to the connection between the basic rule for levying excise duty under Article 2 and the mandatory exemptions under Article 8 of that directive. The main difference between the Commission’s interpretation and that followed by the German Government revolves around the issue of whether the use of mineral oil in certain industrial processes should be subject to excise duty. In that connection, the parties have examined the significance of the exemption in Article 8(1)(d) within the scheme of the directive. As stated above, that exemption concerns the use of mineral oil in blast furnaces for chemical reduction purposes.

60. According to the Commission, the inclusion of that exemption by the amendment made by Directive 94/74 to Directive 92/81 shows that, in the view of the Community legislature, the use in question fell at the outset within the scope of the basic rule contained in the first sentence of Article 2(2) of Directive 92/81. That basic rule must therefore be interpreted broadly. The German Government, on the other hand, maintains that the inclusion of the exemption was merely a clarification which was necessary because of the interpretation applied in Germany. In its opinion, therefore, the inclusion of that exemption does not imply that the first sentence of Article 2(2) of Directive 92/81 must be interpreted broadly.

61. The Commission further argues that Article 8(1) must be interpreted strictly since it contains a derogation from Article 2(2). It refers in this connection to the Court’s case-law on the exemptions included in the Sixth Directive. (23) The German Government contends that the aforementioned case-law is not applicable to the excise duty directives. It points out in that regard inter alia that, unlike the Sixth Directive, the excise duty directives do not also serve as a basis for calculating the Community’s own resources. That dual function of the Sixth Directive explains why uniformity of interpretation is necessary and why the exemptions concerned must also be interpreted strictly.

62. As I have already pointed out above, (24) the system established by the excise duty directives requires the concepts used in those directives to be interpreted uniformly. In my view, the aim and purpose of those directives also demonstrate that the tax base should be interpreted broadly and the derogations from it should be interpreted strictly. I share the Commission’s view that the addition of point (d) to Article 8(1) of Directive 92/81 can only be construed as confirmation that the use referred to in that provision was originally, in principle, subject to excise duty under Article 2(2) of the directive. Since in this case it was considered necessary, clearly for reasons of industrial policy, to exempt the use of mineral oil in blast furnaces from excise duty, a restriction of the scope of Article 2(2) (a solution which would have been closer to the German interpretation) did not suffice, but provision was instead made for an express derogation from the basic rule of taxability. From the point of view of legislative methodology, such a solution is appropriate only where the situation being treated as an exception is, in principle, covered by the basic rule. If the intention was to provide clarification in the sense referred to by the German Government, the question arises as to why other industrial applications, which are exempted from excise duty under point III of the circular, are not also mentioned in Article 8(1).

63. In my opinion, there is no need to consider whether, as argued by the Commission, the Court’s case-law according to which exemptions under the Sixth Directive are to be interpreted strictly is applicable in the context of interpreting the excise duty directives. Greater importance attaches to the fact that, although the Sixth Directive serves as the basis for the generation of part of the Community’s own resources, it is also – in the same way as the excise duty directives – intended to ensure the proper functioning of the internal market and that that objective determines the interpretation to be given to the provisions of both directives.

64. In view of the effects which indirect taxes such as excise duties have on trade in the products made subject to those taxes, and of the effects of those taxes on competition, it is obvious that the harmonised tax base will be the better able to serve the aim of ensuring the functioning of the internal market the more broadly it is defined and in so far as derogations from it remain limited, as far as possible, both in number and in scope. The permitted derogations must also be precisely defined. To the extent that the starting point adopted is a less broadly defined tax base and exemptions which are broadly or vaguely defined, scope will be created for differences between the laws and implementing practices of the Member States, a situation which would not be conducive to achieving the objectives of the internal market.

65. I therefore conclude that an interpretation of the concept ‘use ... as heating fuel’ in Article 2(2) of Directive 92/81 to the effect that certain industrial activities are not subject to the harmonised excise duty would entail leaving the Member States free to decide whether to make those activities taxable and to organise any such tax at their discretion. It is obvious that in that case the objectives pursued by the excise duty directives with regard to the products and activities concerned would not be achieved.

66. I would add that, for reasons of clarity and legal certainty, liability to tax must be based as far as possible on objective factors. If the tax base is partly determined by reference to subjective factors, such as (in this case) the ultimate objective pursued by heating up mineral oil, that will create uncertainty as to whether tax is chargeable and, moreover, facilitate tax evasion. In addition, such a definition of the concept would undermine uniformity in application.

67. I must therefore conclude that, by applying Paragraph 4(1)(2)(b) of the MinöStG in accordance with the interpretation given in the circular to the term ‘Verheizen’ used in that paragraph, the Federal Republic of Germany has failed to fulfil its obligations under Directive 92/81.

VI – Conclusion

68. I therefore propose that the Court should:

–declare that, by applying Paragraph 4(1)(2)(b) of the Mineralölsteuergesetz, the Federal Republic of Germany has failed to fulfil its obligations under Article 2(2) of Council Directive 92/81/EEC of 19 October 1992 on the harmonisation of the structures of excise duties on mineral oils since it has not made all mineral oils intended for use as fuel subject to excise duty;

–order the Federal Republic of Germany to pay the costs.

1 – Original language: Dutch.

2 – OJ 1992 L 316, p. 12.

3 – OJ 1992 L 76, p. 1.

4 – OJ 1992 L 316, p. 19.

5 – OJ 1994 L 365, p. 46.

6 – BGBl. I 2185, rectified in 1993 I, p. 169.

7 – BGBl. I 1982.

8 – III A 1 – 10/97, published in the Vorschriftensammlung Bundesfinanzverwaltung of 6 February 1998, N 08 98, No 70.

9 – Case C-326/99 [2001] ECR I-6831, paragraphs 40 to 50.

10 – Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1).

11 – Case 348/87 [1989] ECR 1737.

12 – Paragraphs 12 and 13 of the judgment.

13 – COM(90) 434 final (OJ 1990 C 322, p. 18).

14 – First and fourth recitals in the preamble to Directive 92/12.

15 – Third recital in the preamble to Directive 92/81.

16 – Sixth recital in the preamble to Directive 92/81.

17 – 18th recital in the preamble to Directive 94/74.

18 – See, in this connection, Case C-434/97 Commission v France [2000] ECR I‑1129, paragraph 17.

19 – See Cases C-382/92 Commission v United Kingdom [1994] ECR I-2435, paragraph 28, and C‑383/92 Commission v United Kingdom [1994] ECR I-2479, paragraph 25.

20 – Case C-296/95 EMU Tabac and Others [1998] ECR I-1605, paragraph 22, and Case C-325/99 Van de Water [2001] ECR I-2729, paragraphs 39 and 40.

21 – Information produced by the Commission in response to a written question from the Court concerning the way in which the phrase ‘use ... as heating fuel’ (‘Verbrauch als Heizstoff’) is defined in various Member States in the context of implementation of Directive 92/81 shows that that phrase is in fact dealt with in quite a variety of ways.

22 – In this regard, I would also draw attention to the case-law according to which ‘the Community legal order does not, in principle, aim to define concepts on the basis of one or more national legal systems unless there is express provision to that effect’ (EMU Tabac and Others, cited in foot note 20, paragraph 30, concerning the interpretation of Article 8 of Directive 92/12). In this case there is no such express reference to national law.

23 – ‘Goed Wonen’, cited in footnote 9. Paragraph 46 of that judgment states that ‘it is settled in case-law that, since the exemptions provided for in the Sixth Directive, in particular in Article 13, are derogations from the general principle stated in Article 2 of the directive, according to which VAT is to be levied on all supplies of goods or services made for consideration by a taxable person, those exemptions must be interpreted strictly ...’.

24 – Point 54 of this Opinion.