OPINION OF MR ADVOCATE-GENERAL GAND

DELIVERED ON 4 MARCH 1970 (*1)

Mr President,

Members of the Court,

The present dispute between the Commission of the European Communities and the Government of the Italian Republic turns on the compatibility of Italian legislation concerning excise duty on products obtained by the processing of cocoa beans with Article 95 of the EEC Treaty.

In order to understand the provisions in dispute and to make a better evaluation of the arguments of the parties two observations must first be made.

First, the products in question are obtainable in Italy either imported already processed or by the processing of the raw material: cocoa beans. Since this product always originates abroad it must be imported, which by law involves the levying of an excise duty; the comparisons which I shall make relate to the amounts of the duty levied on imports of the processed product and of the raw material respectively.

Secondly, it will be helpful to give some indication of the various stages of processing necessary for the use of cocoa beans.

In this connexion I shall refer to the Explanatory Notes to the Brussels Nomenclature (Article 1801 et seq.).

Cocoa beans—which should more accurately be called cocoa seeds—are contained in the fruit of the cocoa tree, each cocoa-pod containing between 25 and 80 beans. They consist of an external covering, the husk and a very thin internal skin covering the kernel. This kernel is the usable part of the bean. Cocoa beans are roasted to facilitate removal of the husk and to render the kernels more friable, as well as to develop their flavour. Then they pass through rollers, which break up the beans and detach the germ; they are then decorticated to separate the shells, husk and germ from the broken pieces of kernel. The shells, husk and germ are waste products which play an important role in the present case. Cocoa paste is obtained by grinding the kernels and may be sold directly to confectioners and pastrymakers, but is mainly used to produce cocoa butter and cocoa powder and is thus a semiprocessed product for use in the chocolatemaking industry.

Cocoa butter is the term used to cover the oils and fats contained in the bean which are generally obtained by pressing cocoa paste or the whole bean. Cocoa powder is obtained by pulverizing cocoa paste, which has first been more or less thoroughly defatted. The latest Italian law, for instance, charges tax at different rates according to whether the cocoa powder has a content in oils and fats higher or lower than 1 %.

Such being the case, pressing techniques enable the processing industry to choose between the various products which may be derived from cocoa beans, and to draw up a production programme in which the quantities of cocoa butter and cocoa powder, as well as their content in oils and fats, may be varied. From the legal point of view, processors may import the raw material either for domestic consumption or temporarily, their choice depending on their plans for the export of processed products and also on the more or less favourable system of taxation imposed on them by the legislature.

II

It is the system adopted by the Italian legislature which has given rise to the present case and which we must now analyse.

The excise duty was established by a Legislative Decree of the Provisional Head of State of 14 October 1946 and was imposed at a single rate on natural or processed cocoa, whatever the nature of the final product, and on husks and skins or cocoa butter. Nevertheless, husks and skins to be used in the extraction of theobromine, an alkaloid used in medicine as a diuretic and a cardiac tonic, are free of duty.

Different rates were subsequently fixed by a Legislative Decree of 3 May 1948, then by Article 13 of Decree Law of 11 March 1950, which Law No 202 of 9 March 1950 made into a law. The rate per 100 kilogrammes were fixed in these last two provisions at:

(a)25000 lire for unroasted cocoa beans, cocoa shells and husks ;

(b)27500 lire for roasted, undecorticated cocoa beans;

(c)31250 lire for roasted, decorticated, broken cocoa beans, cocoa paste, cocoa powder and cocoa butter.

Article 2 of the Legislative Decree of 3 May 1948 extended exemption from the duty to husks and skins to be used to make coffee substitutes.

Another important provision was Law No 291 of 25 May 1954 which authorized the temporary importation of unroasted cocoa beans.

Customs documents drawn up for temporary admission are endorsed in the following ratio, per 100 kilogrammes of cocoa beans:

40 kilogrammes of cocoa butter;

40 kilogrammes of cocoa powder with a butter content less than 1 %, subject, if not re-exported, to an excise duty corresponding to that levied on 32 kilogrammes of cocoa beans;

13 kilogrammes of shells and husks ;

7 kilogrammes for losses, dust, spoiled beans and loss of weight in roasting.

The Commission considered that the implementation of these provisions taken in conjunction gave rise to a situation which was incompatible on various points, which I shall specify later, with Article 95 of the Treaty. It therefore sent four requests for clarification to the Italian Permanent Representative's office between April 1965 and March 1966, but no reply was received. This was also the case with the letter of 19 July 1966 in which the Commission, acting under Article 169 of the Treaty, requested the Italian Government to submit its observations within a period of two months. A reasoned opinion was therefore delivered on 17 January 1967, requesting that Italy's failure to fulfil its obligations under the Treaty should be rectified within 30 days. It was only later, after having forwarded a note from the government departments concerned, that the Italian authorities expressed their willingness to support a draft law proposed by a Member of Parliament to repeal the Law of 25 May 1954, but at first only on condition that this repeal took effect gradually. As this draft law was not enacted, on 18 June 1969 the Commission made an application to the Court repeating the conclusions of its reasoned opinion of 17 January 1969.

However, you will recall that Law No 684 of 1 October 1969 subsequently changed the tax system for cocoa in several respects: First, it repealed Article 13 of the Decree Law of 11 March 1950, changed the various rates of the excise duty and established a special lower rate for cocoa powder with a cocoa butter content lower than 1 % (17000 lire per 100 kilogrammes net weight instead of 22500 lire for powder with a higher butter content).

Secondly, it amended the Law of 25 May 1954 on temporary imports as follows: the 40 kilogrammes of cocoa powder obtained by milling cocoa beans introduced under the temporary import system were made subject, if not re-exported, to the excise duty levied on the same quantity of powder with a butter content lower than 1 %.

Finally, I should add for the record that in another sphere the new Law laid down a rate of 10 % for the turnover tax, to be calculated on the basis of the import value of the product and including the tax payable on products subsequently obtained from the imported product.

Do those amendments to the legislation render this application irrelevant? This was the defendant's opinion but the Commission, the applicant, did not concur and in its written observations and in the course of the oral procedure sustained a proportion at least of its original conclusions. On this occasion it emphasized that various new provisions of the Law of 1 October 1969 consolidated a failure which had been previously impugned or, as was the case with the turnover tax, were such as to aggravate it. It is clear that you cannot—and indeed the Commission has not formally requested that you should—give a ruling on the alleged failure vitiating the legislation which came into being in the course of the proceedings. For a matter properly to be brought before you Article 169 requires a preliminary procedure the outlines of which are clearly defined; this involves requesting the Member State to submit its observations and the delivery of a reasoned opinion coupled with a period of time within which the State must conform to the requirements of the Treaty. On the other hand, the fact that fresh legislation modifies the situation in the course of the proceedings and makes good the failure from the time of its entry into force certainly does not deprive the Commission of the power to request you to give a ruling on the failure which existed in the earlier state of the law. This is very clearly stated in your judgment in Case 7/61 (19 December 1961, Commission v Italy, Rec. 1961, p. 653).

In the light of these observations I shall now consider the various submissions contained in the Commission's application so far as they relate to the legislation prior to the Law of 1 October 1969.

III

The Commission considers that Article 95 was first infringed by the fact that cocoa powder directly imported from other Member States bears a heavier duty than powder put on the market in Italy after it has been produced there by milling beans imported under the temporary import system.

In the first case, under the Decree Law of 11 March 1950, imported cocoa powder is subject to duty at a rate of 31250 lire per 100 kilogrammes or 312.50 lire per kilogramme.

But, under the combined provisions of the Decree Law and of the Law of 25 May 1954, a kilogramme of powder produced in Italy from cocoa beans imported under the temporary import system bears a duty of 200 lire when it is put on the domestic market (40 kilogrammes of powder assessed as equivalent to 32 kilogrammes of cocoa beans, charged duty at the rate of 250 lire per kilogramme). This twofold reduction, of the basic rate payable and of the rate applicable to products manufactured in Italy for the domestic market, from which imported products are excluded, seems contrary to Article 95 of the Treaty. As the Commission recognizes, this has been rectified by the Law of 1 October 1969, which, in the present case, assesses ‘domestic’ cocoa powder on the basis of its real weight and at the rate laid down for cocoa powder with a butter content lower than 1 % and thus puts an end to the infringement at issue. Nevertheless, the Commission requests you to find that up to that date there was a failure to fulfil an obligation under the Treaty.

I believe that this request is admissible as, contrary to the Italian Government's contention, the Commission has never renounced, either expressly or by implication, the submissions contained in its application. The submission is also well-founded, as the system criticized obviously involves taxing the imported product at a higher rate than a similar domestic product. This similarity is a necessary condition for the application of the rule laid down by Article 95, and it exists in the present case. During the oral procedure, the Italian Government's Agent challenged this fact, asserting that cocoa beans, the imported raw material, could not be compared with semi-processed products, such as cocoa powder, whose economic use is different. But that is not the issue. The issue concerns cocoa powder, which has the same characteristics and uses whether it is directly imported or processed in Italy from cocoa beans, and consequently should be accorded the same tax treatment in both cases.

The Italian Government's position is all the more difficult to understand as it has emphasized in its rejoinder that the original taxation system, which applied a single rate of duty to the various products processed from cocoa beans, whatever their content in oils and fats, placed the Italian processing industry at a disadvantage, an argument which is not without substance. On the other hand, the system criticized by the Commission favoured this processing industry in a manner incompatible with Article 95. Lastly, the fact that the product in question is merely one link in the processing chain cannot rule out the application of Article 95, if the imported product and the ‘domestic’ product are at the same stage of processing. On this first point, the Commission's case seems well founded.

The Commission also considers that there has been an infringement of the same article of the Treaty—and this is its second complaint—in that the duty is higher on cocoa powder, butter, shells and husks imported directly from other Member States than on such products obtained in Italy by milling cocoa beans originally imported for domestic consumption.

On the basis of the aforementioned Article 13 of the Decree Law of 11 March 1950 and applying the proportions fixed by the Law of 25 May 1954, the Commission makes the following findings :

—100 kilogrammes of unroasted cocoa beans, imported for domestic consumption (and from which 40 kilogrammes of butter, 40 kilogrammes of powder and 13 kilogrammes of shells and husks must be produced and sold, after deducting 7 kilogrammes as waste) are subject to an excise duty of 25000 lire.

—This duty on the other hand amounts to 28250 lire on imports of products obtained abroad from 100 kilogrammes of cocoa beans in the same proportions, that is: a charge of 12500 lire for 40 kilogrammes of cocoa butter, of 12500 lire for 40 kilogrammes of powder and of 3250 lire for 13 kilogrammes of shells and husks.

The difference of 3250 lire which is apparent from this comparison and which constitutes a discrimination contrary to Article 95 of the Treaty is caused by the duty of 3250 lire imposed per 13 kilogrammes of shells and husks.

This is where the difficulty lies, and the Italian Government's Agent was justified in saying during the oral procedure that the whole issue turns on the taxation system applicable to shells and husks. He recalled on this point that these waste products are exempt from excise duty if they are used for the extraction of theobromine or for the manufacture of coffee substitutes and that this exemption applies to shells and husks imported as such from other Member States as well as to those obtained in Italy by milling imported cocoa beans (Note 3 to Chapter XIII of the Italian Customs Code). But such waste products must be exclusively used for these two purposes, the production of theobromine and coffee substitutes, and the Law of 9 April 1931 prohibits their use in the making of cocoa or chocolate. It was indeed to strengthen this prohibition and prevent any fraud in respect of food that it was sought later to render their use uneconomic by imposing on them a duty of 250 lire per kilogramme, which is not payable if, as stated earlier, they are used for the manufacture of pharmaceutical products or coffee substitutes. The taxation of waste products is therefore purely theoretical and the duty on their importation is only a type of ‘deterrent’. In that case it is unnecessary to take it into account in comparing the duty imposed generally on products produced abroad from 100 kilogrammes of cocoa beans and that applicable to cocoa beans imported for domestic consumption. There is consequently no discrimination.

The Italian Government's argument, developed at length before the Court, presupposes that shells and husks have only the two uses which it has indicated, or at least that in practice they are used only for those purposes. The debate thus moved to this plane as a result of the questions put to the parties by the Court and has taken on a theoretical and technical aspect making it difficult to give a ruling on the substance.

In order to refute the defendant's argument the Commission, in telex No 3816 of 5 February, referred to scientific literature (in particular Fincke's ‘Handbuch für Kakaoerzeugnisse’). On the basis of the chemical analysis of shells and husks, the Commission maintains that these products have varied uses, such as the production of butter by extraction, chocolate substitutes, animal fodder and colouring and flavouring substances. This view is confirmed in the Explanatory Notes to the Brussels Nomenclature which have been given legal force in Italy. According to Notes 1 and 3 to Heading 18.02 cocoa butter may be extracted from the shells and husks detached from the beans during roasting or crushing because they often contain fragments of the kernel adhering to the husk which are difficult to separate from it. Similarly, the powders obtained in cleaning the shells in the sorting machines have a fat content which is often sufficient to make extraction profitable. The final argument of the Commission is as follows: the Italian Law of 9 April 1931 prohibits the use of parts of the shell of the bean for the manufacture of products sold under the designation of cocoa or chocolate but not for the manufacture of chocolate substitutes.

From a scientific point of view those facts are no doubt correct but it must be wondered whether they are not purely theoretical. We are dealing with an economic situation and it is therefore not sufficient that a product may be obtained from another by reason of its chemical composition; it is also necessary that a minimum profit margin may be obtained, unless production takes place in war-time or in periods of extreme necessity.

In reply to the Commission's analysis the Italian Government states that the oils and fats which may be extracted from the shells and husks cannot be classified either as cocoa butter or cocoa fat because they generally contain too high a percentage of non-saponifiable material; moreover, the amount of such oils and fats does not exceed 325 grammes per 100 kilogrammes of cocoa beans, thereby constituting a negligible factor. Likewise, the use of waste material as animal fodder would not only be uneconomic, it would also be inadequate, because of its low protein content and high level of humidity; more suitable products are therefore preferred. With regard to its use in the manufacture of colouring and flavouring materials the organoleptic qualities of such waste material are so low that there is no demand for it on the market. Finally, the Italian Republic disputes the statement that the Law of 9 April 1931 allows the use of chocolate substitutes—and on this latter point the meaning of Article 4 of this Law, on which the parties are in dispute, seems to be doubtful.

But subject to this reservation I incline to the view that the Italian Government's opinion accords better with the facts of the economic situation. At various points in his book Professor Fincke recognizes the possibility of the extraction from wastes of various products, generally of mediocre quality, but he also states that this process is extremely problematic since ‘despite all efforts, no use offering a reasonable prospect of profit has yet been found for them’ (Handbuch für Kakaoerzeugnisse, p. 367). It therefore appears in the final analysis that—apart from their possible use in the manufacture of butter or of powder in circumstances which are forbidden by the legislation of most countries—shells and husks can only be used in the manufacture of theobromine or coffee substitutes, which involve exemption from duty.

It follows from this that the second failure alleged by the Commission, unlike the first, does not seem to have been proved and the application must be rejected on this point.

I shall merely mention for the record the third submission put forward by the Commission in its application: it related to the fact that the refund of the excise duty on exports of products obtained in Italy by milling cocoa beans exceeded the amount of the duty actually paid and was thus contrary to Article 96 of the Treaty.

Provision was made for this refund by Article 4 of the Decree of the Provisional Head of State of 14 October 1946 but it was repealed by Article 3 of the Decree Law of 3 May 1948 and as the Italian Government's Agent formally declared at the hearing, it no longer exists in any form. The Commission therefore withdrew the complaint, to which the defendant did not raise any objection in the course of the extra-judicial procedure and which it first answered in its rejoinder.

To conclude, then, I am of the opinion :

—that a ruling should be given that, by levying, until the Law of 1 October 1969 came into force, an excise duty on cocoa powder directly imported from Member States in excess of that levied on powder produced in Italy by milling cocoa beans imported under the temporary import system, the Italian Republic failed to fulfil an obligation under Article 95 of the Treaty;

—that the remainder of the application by the Commission of the European Communities should be dismissed ;

—that the costs should be borne by the Italian Republic.

* * *

(*1) Translated from the French.