OPINION OF MR ADVOCATE GENERAL MISCHO

delivered on 1 October 1986 ( *1 )

Mr President,

Members of the Court,

Is the application of the highest rate of value-added tax in a Member State to motor cars with diesel engines whose cubic capacity exceeds 2500 cc compatible with Article 95 of the EEC Treaty if only cars imported from other Member States (or from nonmember countries) fall into that category?

That is the question before the Court as a result of the action brought by the Commission against the Italian Republic under Article 169 of the EEC Treaty.

Until 1978 cars in Italy were taxed in accordance with the following system:

(i) cars with engines with a cubic capacity of up to 2000 cc were subject to VAT at the rate of 18%, which was later increased to 20%;

(ii) cars with engines with a cubic capacity of more than 2000 cc were subject to VAT at the rate of 35%, which was later increased to 38%.

A decree-law of 26 May 1978, which was enacted on 24 July 1978, altered the situation as regards cars fitted with diesel engines in so far as the threshold from which value-added tax at the rate of 38% applied to such cars was raised to 2500 cc.

That measure resulted in lower tax being paid on six types of Italian cars and 15 types of cars manufactured in other Member States.

No car manufactured in Italy is fitted with a diesel engine with a cubic capacity greater than 2500 cc. There are, however, two vehicles manufactured in another Member State with cubic capacities of 2996 cc and 2998 cc, which continue to be subject to the rate of 38% (in fact the cars in question are the saloon and the estate-car versions of a single model).

Before considering the merits of the Commission's action I must first consider the objections raised by the Italian Government with regard to the admissibility of the action.

Admissibility

The Italian Government, arguing on the basis of the imperative requirement that the reasoned opinion and the application correspond, contends that at the pre-litigation stage the Commission charged it with having infringed the first paragraph of Article 95 of the EEC Treaty, whereas in the application it asks the Court for a declaration that the Italian Government has failed to fulfil its obligations under Article 95 as a whole. In its view, that discrepancy between the operative part of the reasoned opinion and the claim made in the application renders the action inadmissible in so far as it is based on the second paragraph of Article 95.

The Commission considers that the requirement for the pre-litigation and contentious stages to correspond is based on the need to ensure that the Member State is in a position to prepare its defence fully, which would be impossible were new submissions to be made in the application. However, the Commission has raised no submission in its application that was not brought up in the pre-litigation stage. In view of the general scheme of Article 95 (principle of tax neutrality prohibiting any discrimination) and the Court's tendency to consider matters submitted for its assessment in the light of the whole of that provision, the Commission contends that the Court would consider the reference made simply to Article 95 in the application as appropriate.

There is a consistent line of cases on that point.

I shall merely refer to paragraph 16 of the Court's judgment of 7 February 1984 in Case 166/82 Commission v Italy [1984] ECR 459, in which the Court stated that the reasoned opinion and the application must be founded on the same grounds and submissions.

In the present case, however, the Commission does not seem to have referred in its application to a legal basis which it did not mention in the pre-litigation stage.

The purpose of the application is not defined and circumscribed solely by the operative part of the reasoned opinion but by the whole of its wording.

Indeed, in section 2 of the reasoned opinion the Commission states that in previous correspondence it raised the question of the compatibility of the Italian legislation with Article 95 of the Treaty. It goes on to quote the first and second paragraphs of Article 95 in full. In section 3 of the reasoned opinion it states that ‘even if similarity could be contested, it is impossible to deny the protectionist aims of the provision in question and its incompatibility with the second paragraph of Article 95 of the EEC Treaty’. Finally, before the conclusion of the opinion, the Commission expresses the view ‘that by adopting that measure Italy was pursuing a protectionist aim contrary to the provisions of Article 95 of the EEC Treaty’.

In view of the whole of the foregoing the Italian Republic could not be under a misapprehension as to the scope of the complaint made by the Commission in the pre-litigation stage, that is to say that the system of charging value-added tax on diesel-engined cars has a discriminatory or protective effect. Furthermore, it appears very clearly from the only statement made by the Italian authorities before the issue of the reasoned opinion that they had fully appreciated the scope of the pre-litigation administrative procedure (see the letter of 8 April 1980 from the Italian Permanent Representative, which is annexed to the application).

Accordingly, the aim of the pre-litigation stage, that of giving the Member State the information necessary to enable it to prepare its defence, has been achieved. Italy had the opportunity to submit its observations even if it did not consider it necessary to take full advantage of it. The essential safeguard sought by the authors of the Treaty, namely that of ensuring the right to a fair hearing, has been observed and the contentious procedure has not been vitiated by the alleged discrepancy between the scope of the pre-litigation procedure and the scope of the contentious procedure.

The substantive issues

The task of examining the substantive issues will be made much simpler if the following three points are borne in mind.

1. The Court ( 1 ) has consistently held that in its present stage of development Community law does not restrict the freedom of each Member State to lay down tax arrangements which differentiate between certain products on the basis of objective criteria, such as the nature of the raw materials or the production processes employed. Such differentiation is compatible with Community law if it pursues objectives of economic policy which are themselves compatible with the requirements of the Treaty and its secondary legislation and if the detailed rules are such as to avoid any form of discrimination, direct or indirect, in regard to imports from other Member States or any form of protection of competing domestic products. Moreover, in its judgment of 15 March 1983 in Case 319/81 Commission v Italy [1983] ECR 601 at paragraph 21, the Court accepted that the Member States may ‘adopt, whilst observing the relevant directives, a higher rate of VAT on luxury products as opposed to domestic or imported products not having that quality, provided, however, that the criteria chosen to determine which category of products is to be more heavily taxed are not discriminatory as against imported products similar to or in competition with domestic products in the manner contemplated by the second paragraph of Article 95’. It follows that the fact that a Member State taxes certain types of cars more heavily than others is not in itself open to criticism.

2. Even though the difference between the ‘normal’ VAT rate of 20% and the rate of 38% which is applied in Italy to ‘luxury’ products may at first sight appear considerable, the Commission's criticism is not directed against that difference. The Court has on several occasions had to consider cases in which those rates were at issue and has not disputed Italy's power to set such rates. ( 2 )

3. The third point is that there are objective reasons for taxing diesel-engined cars differently from petrol-engined cars. In its application the Commission sets out in great detail the differences between petrol engines and diesel engines and states in section 10 that ‘the Commission has never criticized the Italian authorities for having adopted for the application of VAT rates on the purchase of diesel-engined cars a criterion other than that employed for petrol-engined cars. On the contrary, the difference in treatment is attributable to and warranted by the very fact that diesel and petrol engines exhibit different characteristics... it would therefore serve no purpose whatsoever to show that it would be wrong to return to an identical taxation system for diesel-engined cars and petrol-engined cars since nobody has ever claimed anything of the sort’. It follows from the foregoing that the dispute actually concerns the following two questions : 1. Is a diesel-engined car capable of being a ‘luxury’ car, and if so, how must the distinction be drawn between ‘luxury’ and ‘non-luxury’ diesel-engined cars? ( 3 ) 2. Is the distinguishing criterion employed discriminatory if it leads in fact to the higher taxation being charged only on vehicles imported from other Member States?

1. Is a diesel-engined car capable of being a luxury car?

Since, according to the case-law of the Court, a system of differential taxation may be implemented only on the basis of objective criteria, it is necessary to consider first of all whether the distinction operated by Italy within the class of diesel-engined cars is based on an objective criterion.

According to the Commission, the ‘characteristics of the diesel engine are not such as to make it suitable, in principle, for installation in luxury cars’ (section 8 of the application).

The Commission thus seems to take the view that no diesel-engined car, no matter what its cubic capacity, should be taxed at the special rate for luxury products.

In support of that view the Commission lists at the end of section 8 of its application ‘the characteristic disadvantages’ of diesel engines. Those disadvantages are notorious and I shall not dwell on them.

However, as the Italian Government rightly observes — and the Commission itself admits in its application — for some years there have been on the market cars fitted with turbocharged diesel engines whose performance falls little short of, if not equals, that of petrol-engined cars of the same cubic capacity and which are capable of reaching high maximum speeds and providing good acceleration.

It therefore seems to me to be going too far to maintain that in no circumstances could a diesel-engined car be regarded as a luxury car.

One might be tempted to conclude that cars fitted with turbocharged diesel engines should be taxed at the same rate as luxury cars in the same way as petrol-engined cars of like power.

But the fact remains that diesel engines — and even turbocharged diesel engines — are generally more economical on fuel than petrol engines.

Lastly and above all, there is no provision of Community law that enables a Member State to be compelled to introduce a system of taxation based on the power of motor vehicles rather than on their cubic capacity.

It therefore remains to be established whether, on the basis of cubic capacity alone, an objective distinction can be drawn within the category of diesel-engined cars between ‘luxury’ and ‘non-luxury’ vehicles.

I consider this to be possible. Larger cubic capacity usually goes hand-in-hand with higher power (compared with a diesel engine of a lower capacity), more spacious coachwork, a fuller or more sophisticated level of equipment and a higher price.

Thus there can be no doubt that a Mercedes 300 diesel (2996 cc, 109 hp, BFR 1031250) ( 4 ) is obviously a more luxurious vehicle than a Fiat Uno diesel (1301 cc, 45 hp, BFR 310000) or a Volkswagen Golf diesel (1588 cc, 54 hp, BFR 362000) but. also more luxurious than a Mercedes 250 diesel (2497 cc, 90 hp, BFR 937500).

A further factor is that Japanese manufacturers market in the Community cars equipped with diesel engines of 3120 cc, 3246 cc, 3432 cc and 3980 cc.

Lastly, if Italy may lawfully make a distinction between a Renault 25 fitted with a 1995 cc petrol engine (103 hp, automatic, BFR 620000) and a Renault 25 equipped with a 2165 cc petrol engine (123 hp, BFR 673875), the latter being classed in the luxury category and taxed at the rate of 38%, why could the same differentiation not be made between two diesel-engined cars, one of which is within the 2500 cc limit and the other beyond it?

The chosen cutoff point does not appear to me to be in any way unreasonable. It was doubtless for absolutely understandable practical reasons that a round figure was chosen, the concepts of ‘2 litre’, ‘2.5 litre’ or ‘3 litre’ engines being well established in automotive circles.

Furthermore, it appears to me, having consulted a specialist car magazine that, by and large, a car with a 2500 cc diesel engine — even one which is not turbocharged — develops power comparable to a car equipped with a 2000 cc petrol engine.

It may therefore be said that the 2500 cc limit adopted for diesel-engined cars corresponds more or less to the 2000 cc limit adopted as the cutoff point between ‘luxury’ and ‘ordinar’ petrol-engined cars.

Finally, I note that the criterion adopted is also independent of the origin of the product.

In point of fact, the circumstances of this case are completely different from those which the Court held to be discriminatory in the abovementioned judgments of 15 March 1983 (taxation of spirits) and 11 July 1985 (VAT— taxation of sparkling wines).

Whereas in those cases the criterion selected, by its very nature, could never apply to domestically produced products, that is not the position here. If one day an Italian manufacturer produces a car equipped with a diesel engine of a cubic capacity of more than 2500 cc, it will automatically be liable to VAT at the rate of 38%.

It must therefore be concluded that the Italian authorities are entitled to regard certain diesel-engined cars as being more luxurious than others on the basis of the criterion chosen which may be considered to be objective and not dependent on product origin.

It remains to be established whether the distinction made is nevertheless incompatible with Article 95 because, in fact, it is only imported cars that fall into the ‘luxury’ category.

2. Is the criterion selected discriminatory?

In its reply the Commission draws attention to the case-law of the Court according to which the criteria chosen to determine the category of products which are more heavily taxed must not discriminate in regard to similar imported products. It then states :

‘However, a criterion such as cubic capacity whose cutoff point is fixed in such a way that the significantly higher rate of VAT is charged solely on diesel-engined cars imported from other Member States manifestly does not fulfil the aforementioned fundamental condition and the differing taxation resulting therefrom cannot therefore be regarded as being compatible with Article 95 of the Treaty.’ ( 5 )

A little further on the Commission adds that it considers that its position is wholly borne out by the Court's reasoning in the Humblot case ( 6 ) which is very similar to this one.

It is indeed necessary to ascertain whether the two cases are on all fours and whether the same solution must therefore be adopted.

At the time when the Humblot case was brought before the Court motor vehicles in France were subject to two different types of annual tax: a differential tax to which cars rated at up to 16 fiscal horsepower were subject, and a special tax on vehicles rated at more than 16 fiscal horsepower. Whereas the amount of differential tax was graduated according to the power rating for tax purposes, the special tax was levied at a single rate, which was almost five times the highest rate of differential tax (FF 5000 as against FF 1100).

The Court observed in its judgment of 9 May 1985 that such a system ‘manifestly exhibits discriminatory or protective features contrary to Article 95’. The Court went on to say: ‘Liability to the special tax entails a much larger increase in taxation than passing from one category of car to another in a system of progressive taxation embodying balanced differentials like the system on which the differential tax is based. The resultant additional taxation is liable to cancel out the advantages which certain cars imported from other Member States might have in consumers' eyes over comparable cars of domestic manufacture, particularly since the special tax continues to be payable for several years. In that, respect the special tax reduces the amount of competition to which cars of domestic manufacture are subject and hence is contrary to the principle of neutrality with which domestic taxation must comply.’

There is no denying that the Humblot case and the present case are similar in so far as it is only imported cars that are in actual fact subject to the higher taxation.

(a) However, in my view, that factor alone does not decisively point to the existence of a discriminatory or protectionist practice.

Let us take, for example, the case of a country like Belgium in which only a verylimited range of cars are manufactured. Belgium applies a system of progressive car tax (the annual motor vehicle tax), which has 30 tiers.

One might be tempted to argue that the domestically assembled cars in tier X of the taxation system are protected by the higher level of taxation charged on cars in tier X + 1 if those cars are all imported from other Member States.

However, the Commission has never challenged such a taxation system and, in the Humblot case, the Court recognized that such a system may be in conformity with the Treaty in so far as the highest rate, which is charged on imported products only, is part of a system of progressive taxation embodying balanced differentials (paragraphs 12 and 15 of the judgment).

The Court's judgments of 14 January 1981 in Chemial Farmaceutici v Daf ( 7 ) and Vinal v Orbat ( 8 ) are also interesting precedents.

In Italy denatured synthetic alcohol, whether of Italian or foreign origin, was subject to a State tax of LIT 12000 per hectolitre; denatured alcohol produced by fermentation (obtained from agricultural products), whether it originated in Italy or in another Member State, was subject to a State tax of LIT 1000 per hectolitre. No synthetic alcohol was manufactured in Italy.

In the aforementioned judgments the Court held: ‘Where, by reason of the taxation of synthetic alcohol, it has been impossible to develop profitable production of that type of alcohol on national territory, the application of such tax arrangements cannot be considered as constituting indirect protection of national production of alcohol obtained by fermentation within the meaning of the second paragraph of Article 95 of the EEC Treaty on the sole ground that their consequence is that the product subject to the heavier taxation is in fact a product which is exclusively imported from other Member States of the Community.’

(b) Secondly, it seems to me that it can also be held that neither is the difference between two rates of taxation decisive in itself

The ratio between the two Italian rates (1: 1.9) is in any event less marked than the ratio between the higher rate of the French progressive tax on cars and the special tax on cars rated at more than 16 fiscal horsepower (1: 4.5).

In the ‘denatured alcohol’ cases mentioned above the ratio involved was of 1: 12, yet was not criticized.

In the field of VAT most Member States have differences ranging from a factor of one to a factor of two.

As I have already pointed out, in the ‘sparkling wines’ and ‘spirits’ cases, to which Italy and the Commission were parties, the Commission did not challenge the rates of 20% and 38% applied in Italy but the way in which the products subject to the higher rate were defined.

(c) What, then, is the decisive criterion pointing to the existence of a discriminatory or protectionist practice?

In my opinion, there is a threefold criterion:

(i) The application of a markedly higher rate,

(ii) which marks a break or a discontinuity with regard to the general taxation system to which the category of products concerned is subject,

(iii) and which is charged solely on products imported from other Member States.

That seems to me to follow from the judgment in the Humblot case in which the Court ruled that:

‘Article 95 of the EEC Treaty prohibits the charging on cars exceeding a given power rating for tax purposes of a special fixed tax the amount of which is several times the highest amount of the progressive tax payable on cars of less than the said power rating for tax purposes, where the only cars subject to the special tax are imported, in particular from other Member States.’

Thus, the French tax was, so to speak, outside the normal system for the taxation of cars, which consisted of a tax which increased progressively with fiscal horsepower. In contrast, in the case of Italy the various rates applied are those of the general VAT system, which provides for several tiers of taxation including a high rate of 38% charged on luxury products.

That rate of 38% is not charged only on diesel-engined cars exceeding 2500 cc and petrol-engined cars exceeding 2000 cc but is also applied to a large number of other products, both Italian and imported, which are classified as ‘luxury products’ by the Italian legislation.

That tends to confirm that the Italian State is not using that rate as a means of dissuasion; in other words, that rate was not ‘calculated’ to discourage imports of certain diesel-engined cars.

On the contrary, it may be considered that the taxation of diesel-engined cars of more than 2500 cc in Italy falls, to use a phrase from the Court's judgment of 3 February 1981 in Case 90/79, ( 9 ) within ‘a general system of internal dues applied systematically to categories of products in accordance with objective criteria irrespective of the origin of the products’.

I would also point out that as early as 4 April 1968 ( 10 ) in the judgment in Firma August Stier v Hauptzolkmt Hamburg-Ericus the Court held that ‘a restraint on the free movement of goods cannot... be presumed to exist when the rate of taxation remains within the general framework of the national system of taxation of which the tax in question is an integral part’.

It may therefore be concluded that the condition laid down by the Court's judgment in Case 319/81 Commission v Italy, cited above, is fulfilled, that is to say that ‘the criteria chosen to determine which category of products is to be more heavily taxed are not discriminatory as against imported products similar to or in competition with domestic products in the manner contemplated by the second paragraph of Article 95’.

Finally, there is one last point which I consider to be important.

Up to now I have followed the logical approach of the Commission, which assumes implicitly that only diesel-engined cars manufactured in Italy can be regarded as similar products to diesel-engined cars manufactured in other Member States.

Is that approach really in accordance with the interpretation which the Court has given to Article 95?

According to the case-law of the Court it is necessary to consider as ‘similar’ for the purposes of the first paragraph of Article 95 products which ‘have similar characteristics and meet the same needs from the point of view of consumers. It is therefore necessary to determine the scope of the first paragraph of Article 95 on the basis not of the criterion of the strictly identical nature of the products but on that of their similar and comparable use’. ( 11 )

Italy in fact produces a whole series of petrol-engined cars of less than 2500 cc (2492 cc) or more than 2500 cc (2849 cc, 2927 cc, 3185 cc, 3500 cc, 4930 cc, 4942 cc, 5763 cc and 5769 cc), of which some at least, in the eyes of a prospective purchaser, may be in competition with top-of-the-ranee diesel-engined cars.

Thus, if one takes a Lancia Thema turbo diesel (2445 cc, 100 hp, BFR 805000), to be ‘similar’ to a Mercedes 300 diesel (2996 cc, 6 cylinders, 109 hp, BFR 1031250), as the Commission does, must not the same reasoning apply to the Lancia Thema V6 which has the same bodywork but a petrol engine (2849 cc, 150 hp, BFR 856000)?

Generally speaking, diesel cars are, for a given cubic capacity, more expensive and less powerful (unless turbocharged) but will be more economical in terms of fuel. The vehicles will provide similar accommodation and equipment and the tax charged on them will be the same. As a result, the consumer's choice will depend on personal factors such as his anticipated annual mileage or his taste for driving fast.

In my view, it follows from the foregoing that the criterion of ‘similarity’ must not be applied simply vertically (diesel-engined cars of greater or smaller cubic capacity) but also horizontally (cars affording comparable accommodation and equipment whatever type of engine is fitted).

Consequently, it can be seen that there are in Italy cars which are ‘similar’ to the large diesel-engined cars imported from other Member States and which are also taxed at the rate of 38%.

There is therefore no discrimination with regard to imported cars.

Conclusion

In the light of all the foregoing I consider that by implementing the tax rules in question the Italian Republic has not failed to fulfil its obligations under Article 95 of the Treaty.

Consequently, I propose that the Court should dismiss the Commission's action and order it to pay the costs.

( *1 ) Translated from the French.

( 1 ) Judgments of 14 January 1981 in Case 140/79 Chemial Farmaceuticii Da/[1981] ECR 1, and Case 46/80 Vinal v Orbai [1981] ECR 77, at paragraphs 14 and 13; judgment of 27 Mav 1981 in Joined Cases 142 and 143/80 Amministrazione delte Finanze dello Stato v Essevi and Carlo Salengo [1981] ECR 1413, at paragraph 21; judgment of 15 March 1983 in Case 319/81 Commission v Italy [1983] ECR 601, at paragraphs 13 and 14; judgment of 4 March 1986 in Case 243/84 John Walker and Sons Ltd v Ministeriat for Skatter oį Ajgiįier [1986] ECR 875, at paragraph 22; judgment of 4 March 1986 in Case 106/84 Commission v Denmark [1986] ECR 833, at paragraph 20.

( 2 ) Judgment of 15 March 1983 in Case 319/81 Commission v Italian Reputile (taxation of spirits) [1983] ECR 601; judgment of 11 July 1985 in Case 278/83, Commission v Italian Republic (VAT — taxation of sparkling wines) [1985] ECR 2503.

( 3 ) See also the defence of lhe Iulian Government, section 7, paragraph 5.

( 4 ) The prices given are net of VAT.

( 5 ) Section 2.1 of the reply.

( 6 ) Judgment of 9 May 1985 in Case 112/84 Humblot v Directeur des services fiscaux [1985] ECR 1367.

( 7 ) Case 140/79 [1981] ECR 1.

( 8 ) Case 46/80 [1981] ECR 77.

( 9 ) Case 90/79 Commiaitm v France [1981] ECR 283, 301, paragraph 14.

( 10 ) Case 31/67 [1968] ECR 235.

( 11 ) Judgment of 27 February 1980 in Case 169/78 Commission v italy [1980] ECR 385, paragraph 5.