1.

The first and overriding objection is that on 18 March 1976, three days after the adoption of Regulation No 567/76, a Decree law (No 46) was passed which raised the taxes on wine-based alcohol and on alcohol made from molasses in such a way as to make wine-based alcohol cheaper than molasses-based alcohol. Prior to the Italian decree, and indeed since 1970, both wine-based and molasses-based alcohol bore a manufacturing tax of LIT 90000 per hectolitre. In addition, molasses-based alcohol bore a State tax of LIT 27000 per hectolitre, a level maintained since 1955. Prior to that decree, it is accepted that the sale prices of molasses-based alcohol was LIT 143000, that of wine LIT 147000, per hectolitre. By Decree No 46, the manufacturing tax was raised to LIT 120000 for both products and the State tax was raised to LIT 40000 for molasses-based alcohol. It is agreed, though the full make up of the figures has not been given, that in the result wine-based alcohol was sold at LIT 185000 and molasses-based alcohol was sold at LIT 188000. The Italian Government claims that this was a perfectly proper exercise of a taxing power vested in it. The Decree was not limited to alcohol, it covered many other products and to a large extent involved updating taxes to take account of the effects of inflation. Whilst accepting that a fiscal measure may be incompatible with Community law if its purpose or effect would be to disrupt the market, the Italian Government contends that a measure is not incompatible with Community law if its purpose and main effect are fiscal and any other effects on the market are of minor relevance. It has not been contended here that the taxes introduced were discriminatory and contrary to Article 95 of the Treaty, or that there is any State aid contrary to Article 92. The Commission, however, relies on the Court's decision in joined Cases 15 and 16/76 France v Commission [1979] ECR 321 at pp. 338-341 in which it was said that ‘in applying Community rules the Member States cannot unilaterally adopt additional measures which are such as to compromise the equality of treatment of traders throughout the Community and thus to disturb competitive conditions between the Member States’. Even if what happened in this case was not strictly an aid, as in the French case, where both the intention (to provide extra aid because the French Government thought that the measures taken and the aid fixed by the Community were insufficient)-and the effect (twice the amount contemplated to be covered by Community aid to France was given as aid) were clear, the principle is the same and it applies in this case to what is a sort of indirect aid. The Commission contends that, if it is shown that either the intention or the effect of a national measure is to interfere with the functioning of steps taken by the Commission in an organization of the market, the Member State cannot rely on what is done purportedly under Community arrangements, as being done according to Community rules so as to entitle it to claim against the EAGGF. This seems to me to go too far. If a Member State adopts measures which can be shown to have no effect on the operation of an exercise like the present, even if they were intended to do so, then it does not seem to me that the Member State is automatically disentitled from claiming against the Fund. On the other hand, if there is an intention to take additional measures which in the normal course would be likely to have a distorting effect on what is done at Community level, then the effect may be presumed, unless the contrary is proved. In cases like 177/78 Pigs and Bacon Commission v McCarren & Co. Ltd [1979] ECR 2161, joined Cases 36 and 71/80 Irish Creamery Association v Ireland [1981] ECR 735 and Case 297/82 De Samvirkende Danske Landboforeninger v Ministry of Fiscal Affairs [1983] ECR 3299, the Court, although considering the object of the national measures, in the end looked to those situations in which the measures had or might have distorting or deleterious effect. It is to be borne in mind that in Case 177/88 the Court defined Member States' obligations as being ‘to refrain from taking any measures which might undermine or create exceptions’ to the Community scheme. So far as intention is concerned in the present case, the Commission relies heavily on a note from the Ministry of Agriculture dated 24 March 1982 to the effect that the Community Regulation had not achieved the desired effect, partly because the market was saturated with wine-based alcohol and partly because of the competition of molasses-based alcohol which was cheaper to produce. Decree No 46 was thus said to be necessary, not only for raising further revenue, but also because increasing the price of molasses-based alcohol ought to encourage the production and consumption of wine-based alcohol. Moreover it was said that Decree No 46 was insufficient to achieve the objective of Community intervention measures. Accordingly on the same day as Decree No 46 was made, a further decree fixed the price of alcohol made from table wines produced in 1975 at LIT 61000 per hectolitre net of tax. In the Application it was said that this did not provide any unjustified benefits for Italian producers and distillers because the market price was LIT 65000. That particular point, however, disappeared when it was accepted that no alcohol was in fact sold at the lower price fixed by the second decree. The Italian Government, accepting that intention is relevant, seeks to avoid the effect of this ‘unfortunate’ note by saying that it was written long after the event and was mistaken. Moreover it emanated from the Ministry of Agriculture which was not recorded as having been consulted before Decree No 46 was promulgated. I do not find this latter argument persuasive. The Ministry could still have been consulted, and, in any event, could subsequently have been fully informed as to the Government's intentions and authorized to write on its behalf. I find it impossible to reject this document from a Government department, which was clearly written with care, as being wholly unreliable as to the Government's intention. It seems to me to show that the intention at the time was to give further encouragement to the use of wine for distillation over and above that provided for in Community measures. The fact that these taxes were included in a general decree may show that the decree was fiscal, but that in itself does not exclude an intention to influence the operation of a Community measure. Here the decree was adopted just after the Community Regulation was made, and it came into effect before the distillation campaign, which was of short duration, began. The relevant change (increasing the tax on molasses-based alcohol) was made at this juncture for the first time in 21 years and it has not been suggested that it could not have awaited the termination of the campaign. These factors, though they should not be exaggerated, seem to me to give some support for the Commission's submissions as to the intention behind the measures. The more important question to my mind, however, is whether the decree had the effect contended for by the Commission. I do not accept the Commission's argument that the difference in price between alcohol made from wine and that from molasses automatically meant that the distillers had better profit margins than if Community aid alone had been granted. Whether that was so depends on a detailed consideration of the makeup of bpth prices, which apart from the tax elements, has not been produced. Nor on the evidence am I prepared to assume, as the Commission contends, that producers were or could be paid more than the minimum price fixed since the distillers in effect could share out the alleged extra profits with them. There is no evidence of this and it was, to my mind, for the Commission to prove it. On the other hand, it seems to me to be inescapable that (1) if wine alcohol could be sold more cheaply than molasses-based alcohol, more of the former would be sold since the two are in competition; (2) it follows that more wine would be purchased by the distillers; (3) since the aim was to pay a price for wine to be distilled, which was sufficiently attractive above the market price, the producers would make more overall profit because they could sell more wine and this would no doubt be at the expense of the producers of molasses. That this is so is borne out by the statement in the Ministry of Agriculture's note to the effect that ‘thanks’‘.o’ the two decrees (of which one is now accepted to have had no effect) the distilling operation had a certain success in Italy since it had permitted 2.3 million hectolitres of wine to go to the distillery. The difficulty in this case arises from the need to preserve the balance between the right of a Member State to regulate its own tax laws and the need to ensure that Community measures are not undermined, intentionally or unintentionally by steps taken, even in the form of taxation measures. I also think it is important to bear in mind that, although this is in form a challenge by Italy, and not an application by the Commission under Article 169 of the EEC Treaty, the essential question is whether Italy has been in breach of the Treaty. To that extent, at any rate to begin with, it seems to me that the burden of establishing the breach is on the Commission. By this test it seems to me that the Commission has established in this case that additional measures were taken which affected the operation of the Community measures for distillation. This is so if, even perhaps because, in the result it may be said that the Italian Government was succesful in its aim of achieving the same object as that sought by the Community. The second Regulation, No 1281/76, was, of course, made after the Italian Decree No 46. It is said that the Commission or the Council, with knowledge which it had or ought to have had, has thereby accepted that the decree did not distort or adversely affect the Community scheme. I do not accept this. I do not consider that the Commission is in any sense fixed with knowledge of national legislation unless that is communicated to it. It is not suggested that that was done here. There ought to be a full communication between the Commission and Member States as to taxation or other legislation which may affect future Community legislation, particularly if the Management Committee procedure is adopted. I would, accordingly, not draw any distinction in this case between the two regulations. The position, if a Community regulation is made which conflicts with an existing national rule, particularly where the latter has an indirect rather than a direct effect on a Community project, and the terms of which are communicated to the Commission before the Community legislation is adopted, raises different issues which do not arise here. On the first point in this case, it seems to me that the Commission's argument should be upheld to the extent indicated.