DELIVERED ON 25 NOVEMBER 1980 (*1)

Mr President,

Members of the Court,

1. This action seeks to have declared void a Commission decision, namely Decision 79/895 of 12 October 1979 adopted in regard to the Federal Republic of Germany and concerning the clearance of accounts in respect of expenditure for 1973 financed by the Guarantee Section of the European Agricultural Guidance and Guarantee Fund. The Commission has refused to credit the German Government with a proportion of the declared expenditure (a little more than DM 9 million), claiming that that proportion may not be financed by the Fund since it was not incurred in respect of intervention intended to stabilize agricultural markets in accordance with Community rules within the framework of the common organization of agricultural markets (final recital in the preamble to the said decision). The German Government, however, regards as unwarranted and unlawful the disputing of the figure declared under Head 6210 (aid for skimmed-milk powder intended for animal feed), from which stems the disallowance of expenditure of roughly DM 8335000. In that lies the source of the action, which divides into three submissions: infringement of rules of secondary Community law, infringement of the principle of the protection of legitimate expectation and inadequacy of the statement of the reasons upon which the decision was based.

2. The rules concerning aid for skimmed milk produced in the Community and used for animal feed date back to Article 10 of Regulation No 804/68 of the Council of 27 June 1968 on the common organization of the market in milk and milk products. Whilst that article provided for the grant of such aid, it deferred the determination of the conditions to be attached to it to a subsequent act by the Council. Consequently, there was promulgated Regulation No 986/68 of 15 July 1968, Article 2 of which details the categories of skimmed milk for which the aid may be granted. Subsequently, the Commission laid down detailed rules for the grant of the aid in Regulation No 1106/68 of 27 July 1968 and Regulation No 990/72 of 15 May 1972.

3. The rules which principally fall to be considered in the context of the first submission in the action are those in Regulation No 990/72. It is appropriate to observe in this regard that Article 1 of that regulation makes the grant of aid for skimmed-milk powder subject to its having been denatured (by means of the additives mentioned in Article 2 and subject to observance of Article 3) or having been used in the manufacture of compound feedingstuffs. Article 3, which lies at the centre of the present dispute, is concerned with the supervision of denaturing. In that regard, the fourth recital in the preamble stresses that “it is important to ensure effective supervision of the proper operation of this process” and that “spot checking of denaturing undertakings would be an appropriate means of achieving this end”. Accordingly, Article 3 (1) provides: “Denaturing shall be supervised on the premises. Each Member State shall appoint an agency to carry out this supervision”. Paragraph (2) of that article then lays down: “The concern undertaking denaturing shall, in good time beforehand, communicate in writing to the agency referred to in paragraph (1):

(a)its business name and address;

(b)the quantity of skimmed-milk powder to be denatured;

(c)the place where denaturing will take place;

(d)the expected duration of the denaturing process. The agency concerned may request additional information.”

Finally, Article 10 obliges Member States to take “all measures necessary to ensure that the provisions laid down in this regulation are complied with”.

It has transpired in the present case that the Federal Republic of Germany, intending to comply with the obligation imposed by the aforementioned Article 10 (and, previously, by the corresponding Article 8 of Regulation No 1106/68), issued directives through the agency of the Bundesamt für Ernährung und Forstwirtschaft [Federal Bureau for Food and Forestry] but did not introduce the system whereby undertakings must give written notification of denaturing operations under Article 3 (2) of Regulation No 990/72. It considered that it sufficed for the objective of that article to be attained by other means and it therefore set up a system of supervision based principally on periodical retrospective checks on the accounting records kept by the undertakings carrying out denaturing. In its view, such checks permit the veracity of the applications for aid submitted by each undertaking to be established with accuracy. Moreover, some samples are taken and some physical checks on the denaturing operations are carried out on the occasion of the accounting checks. Besides, the fact that each inspector is entrusted with the task of continually monitoring the activities of a limited number of undertakings allows information to be sought and obtained as to the dates on which those operations take place and to carry out spot checks on such occasions, in addition to the periodical checks. In those circumstances, to require preliminary notification of each operation was regarded as superfluous, at least until 1977 (when the system of notification was introduced).

4. As regards the interpretation of the Community legislation referred to above, the argument of the German Government is that in the field with which the Court is now concerned, the only obligations incumbent upon Member States are those prescribed by Article 10 and Article 3 (1). According to that argument, Article 10 leaves States a discretionary power to lay down such measures of control as are necessary to ensure observance of the regulation, whilst Article 3 (1) requires, as I have stated, supervision of denaturing “on the premises” and the appointment of an agency to perform that task. According to the German Government, carrying out supervision “on the premises” is not confined to performing purely physical checks on denaturing operations; accounting checks also fall within that concept. As for the rules contained in Article 3 (2), they are addressed to the undertakings and it would be wrong — still according to the German Government's argument — to infer from them a formal system of notification binding on Member States also. On the contrary, since such notification is intended to assist the authorities, the system ceases to be mandatory where the State authorities have selected a method of supervision which renders it superfluous.

In my opinion the argument advanced by the German Government cannot be accepted. The supervisory measures which Member States are obliged to take under Article 10 of Regulation No 990/72 are those which are necessary to ensure observance of the provisions of that regulation, that is to say, observance of all its provisions, including Article 3 (2). The fact that the last-mentioned provision is addressed to undertakings does not mean that Member States are not bound to require its observance and, moreover, to regulate the work done by their competent authorities in such a manner that it is coordinated with the notification system. The power to request additional information which is conferred on the competent agency by the last sentence of Article 3 logically implies that that agency has received and evaluated the prescribed, usual information. I would add that, where a provision is addressed directly to undertakings, it cannot be accepted that any Member State may exempt those undertakings from an obligation arising under a Community regulation. That would be equivalent to disregarding the rule that regulations are of general application and directly binding, as well as the principle of uniformity of treatment of citizens throughout the Community. Of course, the German Government considers itself authorized by Article 10 not to take account of Article 3 (2), but Article 10 is clearly not a rule which empowers Member States to derogate from other provisions of the regulation. On the contrary, as I have just stated, Article 10 is directed towards ensuring full effect for the entire regulation.

The German Government's efforts to demonstrate the superiority, in practical terms, of the system of accounting checks adopted in its territory cannot affect the answer to the issue before the Court, which is one of pure law. In any event, the results of those efforts are, in my opinion, not convincing. The question which the Court has to consider is a purely legal one, inasmuch as the issue is whether the German Government did or did not comply with Regulation No 990/72. In fact, on that depends the question whether the expenditure which the German Government declared in respect of aid for skimmed-milk powder intended for animal feed was properly incurred and whether, consequently, the German Government is entitled to reimbursement when the accounts of the European Agricultural Guidance and Guarantee Fund are cleared. Even supposing, therefore, that the German system of supervision were superior to that defined by the Community legislature, its lack of conformity with the Community rules would suffice to justify the conclusion that the declared expenditure was irregular. In that regard, I would make the observation that the Commission does not need to show that the denaturing of the milk did not occur or has not been proved in order to preclude the charging to the European Agricultural Guidance and Guarantee Fund of the sums paid to undertakings by way of aid. It is enough to find that the German administrative authorities did not ensure observance of the detailed rules prescribed by Regulation No 990/72, thereby breaching one of the conditions for the regularity of denaturing.

The case-law of the Court is clearly aligned in that direction. In particular, certain statements contained in the judgment of 7 February 1979 in Case 11/76 Netherlands v Commission [1979] ECR 245 are relevant. According to that judgment, the provisions relating to the financing of the common agricultural policy (Articles 2 and 3 of Regulation No 729/70 of 21 April 1970 were involved) “permit the Commission to charge to the EAGGF only sums paid in accordance with the rules laid down in the various sectors of agricultural production while leaving the Member States to bear the burden of any other sum paid ...” (paragraph 8 of the decision). The Court added inter alia: “In fact the management of the common agricultural policy in conditions of equality between traders in the Member States requires that the national authorities of a Member State should not, by the expedient of a wide interpretation of a given provision, favour traders in that State to the detriment of those in other States where a stricter interpretation is applied” (paragraph 9 of the decision). The point of view adopted by the Court in that case was repeated, in identical terms, in the judgment in Case 18/76 Germany v Commission [1979] ECR 345, which was also delivered on 7 February 1979, at paragraphs 7 and 8 of the decision. Finally, in the judgment of the same date in Joined Cases 15 and 16/76 France v Commission [1979] ECR 321 it was stressed that the objective of any decision of the Commission concerning the discharge of accounts presented by the Member States in respect of expenditure financed by the EAGGF “is to assess whether it may be accepted that the expenditure was incurred by the national authorities in accordance with Community provisions” (paragraph 9 of the decision). From that the Court deduced that where, under those provisions, the payment of aid is made subject to compliance with certain formalities relating to proof, aid paid in disregard of that condition may not be charged to the EAGGF since it is not in accordance with Community law (paragraph 10 of the decision).

I have also stated that I do not find convincing the German Government's argument that the system of supervision adopted in the Federal Republic is more effective than that provided for by Regulation No 990/72. In fact, that regulation requires inter alia that the milk should not contain certain substances (for example, starch) and that the denaturing should be carried out using specified additives (Article 1 (3) and Article 2). It seems to me that “physical” supervision of the denaturing operations permits observance of that condition to be checked with greater certainty than do ex post facto accounting checks. The fact that the inspector is in a position to be present during those operations is always of considerable importance, whereas the applicant itself has conceded the possibility that its inspectors might not be aware of particular denaturing operations. Above all, however, I agree with the argument that, in addition to ensuring the useful result of keeping the supervising agency informed of the dates upon which every denaturing operation is to take place, compulsory notification has the advantage of deterring undertakings from carrying out irregular operations, inasmuch as they have reason to expect the attendance of the inspector on the date indicated.

Next, I do not consider that the German Government may derive any argument in favour of its point of view from the fact that under Council Directive 77/435 of 27 June 1977 — on scrutiny of transactions forming part of the system of financing by the Guarantee Section of the EAGGF — Member States are bound, as from 1 July 1979, to bring into force a system for scrutinizing the commercial documents of undertakings receiving payments. In fact, that system complements, but does not replace, the procedures for “physical” supervision laid down by earlier provisions. The same consideration applies as regards Commission Regulation No 1725/79 of 26 July 1979, which took the place of Regulation No 990/72. It is true that the new regulation requires the keeping of accounts in a manner which facilitates supervision of the grant of aid for skimmed-milk powder, but it also confirmed in its entirety the system of preliminary written notification (Article 3 (3)). The latest rules have the merit of demonstrating with absolute clarity that “on the spot” supervision of a physical character (certified by an analysis report, a specimen of which constitutes Annex I to the regulation) is one thing and that scrutiny of commercial documents and accounts (see Article 10 (2)) is another. In my opinion, that corresponds to the correct interpretation of the concept of “supervision on the premises” which has already appeared in Regulation No 990/72.

It is impossible therefore to hold that the accounting checks in force in Germany at the period under consideration were equivalent to the supervision prescribed by Regulation No 990/72. Article 10 of that regulation, in which the German Government erroneously perceived a rule authorizing it to depart from the system laid down by Article 3, undoubtedly allowed Member States who so wished to add accounting supervision to physical supervision, provided that the system of notification was observed. Had it availed itself of that opportunity, the German Government would have anticipated the approach adopted by the Commission in the aforementioned Regulation No 1725/79. But no Member State had power to adopt scrutiny of accounts as its principal method of supervision and not implement the system of notification which was, and still is, an essential element in the “physical” supervision of denaturing.

I now turn to consider the second submission in the application. The German Government invokes the principle of the protection of legitimate expectation, stating that the Commission, in addition to never having put forward any objections to the German system of supervision prior to 1977, expressly approved that system. In that regard, the applicant refers to an exchange of views on supervision procedures in relation to aid for milk producers which took place in Brussels and, in particular, to the reply given by the Commission to the observations contained in the report by the Audit Board on the accounts for the 1975 financial year. In that reply the Commission stated that it considered the Community rules to have been complied with “when a Member State combines verification of the accounting records with unannounced spot checks on denaturing, supplemented by the taking of samples, and all these checks are performed, on the ground”.

5.It appears to me that this attitude previously adopted by the Commission is not of such a nature or import as to warrant the inference which the German Government seeks to draw from it, which is, that any error on its part in applying Community rules may be laid at the door of the Commission. In fact, so far as concerns the 1974 exchange of views, organized at the request of the German authorities by the Commission's Directorate-General for Information, it must be recognized that it was entirely informal in nature and certainly could not prejudice the Commission's position when the accounts came to be cleared. Moreover, precise information on the scope of its outcome is lacking. The only factor carrying a certain weight is constituted by the fact that in replying to the observations made by the Audit Board, the Commission, in substance, stated that it considered lawful the German system, in which it noted a combination of accounting checks and physical supervision. However, it is appropriate to make clear that the report of the Audit Board relating to the application in Germany of Regulation No 990/72 during 1975 was confined to expressing reservations on the absence of systematic physical supervision and that it was in answer to those reservations that the Commission stated that it regarded unannounced checks “on the premises” and the taking of samples, in conjunction with accountancy checks as sufficient. But there was not raised the now crucial point concerning the non-introduction of the system of written notification provided for in Article 3(2) of Regulation No 990/2, a matter of which the Commission states it was not aware until checking, in 1979, the accounts for the 1973 financial year (see p. 5 of the rejoinder). So there can be no question of allowing the applicant to maintain its position contrary to the system of preliminary notification by means of reliance on a statement by the Commission which was not concerned with that issue. Even less tenable, in my opinion, is the view that the Commission gave its tacit consent to the German Government's conduct and that that consent makes it impossible now for that institution to “venire contra factum proprium” by refusing to recognize the entries for expenditure relating to aid for producers of powdered milk intended for animal feed.

6.In its final submission the applicant challenges the decision of 12 October 1979 on the ground that the statement of the reasons upon which it is based is inadequate. It should be said that in the final recital in its preamble that decision refers to Articles 2 and 3 of Regulation No 729/70 and stresses the link between the financing of intervention in the agricultural sphere and observance of Community rules. It then states that inspections carried out show that a part of the expenditure declared amounting to DM 9192762 does not satisfy the requirements of the Community rules on refunds or intervention and therefore cannot be financed. Finally, it states that “the Member State has been fully informed of this deduction and has been able to give its views thereon”.

That final statement accurately reflects the events preceding the contested decision. The correspondence between the German Government and the Commission — especially the letter of 29 September 1977 from the Commission's Director-General for Agriculture to the German Permanent Representative in Brussels and the letter of 19 January 1978 from the Federal Minister for Finance to the Director-General — had already put the German Government in a position to know which part of the expenditure declared by it the Commission refused to charge to the EAGGF. Moreover, between November 1977 and July 1979 the question was examined on various occasions by the EAGGF Committee, on which the Federal Republic is represented. Further, the draft summary report submitted by the Commission to that committee in February 1979 gave detailed justification for the reduction of DM 8335232, which gave rise to the action, under the heading “supervision of the denaturing of skimmed-milk powder” (p. 34, paragraph 2.3.3.8).

The German Government was therefore closely involved in the process by which the contested decision was made and it was well aware of the reasons for which the Commission considered that a part of the declared expenditure was not in accordance with Community rules. It knew the extent to which the reduction effected by the Commission related to expenditure on aid for producers of skimmed-milk powder, which rules were alleged not to have been complied with and which facts, according to the Commission, constituted such noncompliance with Community law. In those circumstances, only a very strict and formalistic conception of the obligation to state reasons laid down by Article 190 of the EEC Treaty could lead to acceptance of the argument that the contested measure did not contain a sufficient statement of the reasons on which it was based. However, one knows that such a conception is foreign to Community law. In its judgment of 11 January 1973 in Case 13/72 Netherlands v Commission [1973] ECR 27 this Court properly stressed that “the extent of the duty to state reasons ... depends on the nature of the act in question and on the context in which it is adopted” and added that “in the present case it is not disputed that the Netherlands Government was closely involved in the process of making the contested decision and was therefore aware of the reason why the Commission did not consider that it should accede to the demand for reimbursement by the said Government ... ”. In the present case, the situation appears to me to be the same. I therefore consider that the third submission in the application cannot be upheld.

7.In conclusion, therefore, I propose the dismissal of the action brought by the Federal Republic of Germany against the Commission by application lodged with the Court Registry on 19 December 1979. The costs must be borne by the unsuccessful party.

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(1) Translated from the Italian.