OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 3 March 2005 ( )

Case C-240/03 P

Comunità montana della Valnerina

v

Commission of the European Communities

Intervening party:

The Republic of Italy

(Appeal – EAGGF – Assistance granted to a pilot demonstration project for forestry, agriculture and food programmes – Cancellation of financial assistance)

I – Introduction

1. The present appeal concerns the repayment of Community assistance for a pilot demonstration project for forestry, agricultural and food programmes. ( ) The Commission awarded a grant in the amount of 50% of the costs up to ECU 908 558 for a joint project of the Italian local authority of Valnerina and of the French association Route des Senteurs. The Commission paid 70% of the maximum amount of the award in advance. In the course of an inspection of expenses claimed the Commission discovered irregularities, and thereafter requested that Valnerina repay the assistance it had already paid.

2. Valnerina brought an action for annulment of this decision before the Court of First Instance. The Court set the Commission’s decision aside in so far as it required Valnerina to repay assistance that had gone to Route des Senteurs. By this appeal Valnerina challenges the rest of the Commission’s decision that it repay the assistance it retained. The Commission’s cross-appeal challenges the Judgment of the Court in so far as it set the Commission’s decision aside.

II – Legal framework

3. Article 24 of Regulation (EEC) No 4253/88, ( ) as amended by Regulation (EEC) No 2082/93, ( ) provides with regard to the reduction, suspension and cancellation of Community assistance:

‘1. If an operation or measure appears to justify neither part nor the whole of the assistance allocated, the Commission shall conduct a suitable examination of the case in the framework of the partnership, in particular requesting that the Member State or authorities designated by it to implement the operation submit their comments within a specified period of time.

2. Following this examination, the Commission may reduce or suspend assistance in respect of the operation or a measure concerned if the examination reveals an irregularity or a significant change affecting the nature or conditions for the implementation of the operation or measure for which the Commission’s approval has not been sought.

3. Any sum received unduly and to be recovered shall be repaid to the Commission. Interest on account of late payment shall be charged on sums not repaid in compliance with the provisions of the Financial Regulation and in accordance with the arrangements to be drawn up by the Commission pursuant to the procedures referred to in Title VIII.’

III – Facts and procedure

A – Facts and proceedings at first instance

4. The Court described the facts and the first instance proceedings as follows: ( )

5. In June 1993 Valnerina sent the Commission an application for Community assistance for a pilot demonstration project for forestry, agricultural and food programmes in marginal hill areas (Project No 93.IT.06.016, hereafter ‘the project’).

6. It is clear from the project that its overall objective was to set up and carry out a pilot demonstration of two forestry, agricultural and food programmes, one by Valnerina in Valnerina (Italy), the other by the ‘Route des Senteurs’ association in the Drôme Provençale region (France), in order to introduce and develop alternative activities such as rural tourism in parallel with the usual agricultural activities. The project provided in particular for setting up two tourist promotion and coordination centres, developing production of typical local food products such as truffles, spelt wheat and aromatic plants, better integration of the various producers operating in the regions concerned, and the improvement and environmental rehabilitation of those regions.

7. By Decision C(93) 3182 of 10 November 1993 addressed to Valnerina and to Route des Senteurs, the Commission awarded the project a grant from the EAGGF Guidance Section (hereafter ‘the award decision’).

8. The second paragraph of Article 1 of the award decision stated that Valnerina and Route des Senteurs were ‘the bodies responsible’ for the project. Article 2 of the award decision stated that the period for the completion of the project was to be 30 months, that is to say, from 1 October 1993 to 31 March 1996.

9. The first paragraph of Article 3 of the award decision stated that the total eligible cost of the project was ECU 1 817 117 and the maximum financial contribution from the Community was set at ECU 908 558.

10. Annex I to the award decision contained a description of the project. Point 5 of that annex described Valnerina as the ‘beneficiary’ ( ) of the financial assistance and Route des Senteurs as being the ‘other body responsible for the project’. Point 8 of the same annex contained a financial scheme for the project with a breakdown of the costs allocated to the various measures under the project. The measures under the project and the corresponding costs were set out in four sections, with Valnerina and Route des Senteurs each carrying out measures coming under two of those four sections.

11. Annex II to the award decision laid down the financial conditions relating to the award of the assistance. In particular, it stated that if the beneficiary of the financial assistance intended to make any significant changes to the operations described in Annex I it was to inform the Commission beforehand and obtain the latter’s agreement (point 1). Point 2 of that annex stated that award of the assistance was conditional upon completion of all of the operations described in Annex I to the award decision. Annex II also provided as follows: the financial assistance was to be paid direct to Valnerina as the beneficiary of the assistance and the applicant was responsible for paying Route des Senteurs (point 4); the Commission was authorised, for the purposes of verifying the financial information concerning the various expenditure, to ask to examine any original, or a certified copy, of a supporting document and to carry out that inspection directly on the spot or request the documents in question to be sent to it (point 5); the beneficiary was to keep for the Commission, for a period of five years from the last payment by the Commission, all originals of the documents supporting the expenditure (point 6); the Commission could at any time ask the beneficiary to send reports on the state of progress of the work and/or the technical results obtained (point 7); and the beneficiary was to keep for the Community the results obtained through implementation of the project, although that should not give rise to any additional payments (point 8). Lastly, point 10 of Annex II stated in essence that if any of the conditions laid down in that annex was not complied with, or if any measures not provided for in Annex I were undertaken, the Commission could suspend, reduce or withdraw the assistance and require repayment of what had already been paid, in which case the beneficiary would be entitled to send its observations beforehand within a time-limit fixed by the Commission.

12. On 2 December 1993 the Commission paid Valnerina an initial advance of approximately 40% of the proposed Community contribution and Valnerina, in turn, paid Route des Senteurs the sums corresponding to the cost of the measures under the project which the latter was to carry out.

13. On 27 December 1994 Valnerina sent the Commission an initial report on the state of progress of the project and on the expenditure already incurred in respect of each of the proposed measures. At the same time it applied for payment of a second advance, confirming in particular that it had evidence of payment in respect of the expenditure incurred, and also that the measures that had already been carried out were in accordance with those described in Annex I to the award decision.

14. On 18 August 1995 the Commission paid Valnerina a second advance of approximately 30% of the Community contribution and Valnerina in turn paid Route des Senteurs the sum corresponding to the cost of the measures under the project which the latter was to carry out.

15. In June 1997 Valnerina sent the Commission the final report on the implementation of the project. At the same time it applied for payment of the balance of the Community contribution and again attached confirmation corresponding in essence to that described in paragraph 13 above.

16. On 12 August 1997 the Commission informed Valnerina that it had instigated a general technical and accounting check for all the projects financed under Article 8 of Regulation No 4256/88, including the project concerned in this case, and it requested Valnerina, under point 5 of Annex II to the award decision, to produce a list of all the supporting documents relating to the eligible expenditure incurred in connection with implementing the project, together with a certified true copy of each of those documents.

17. On 25 August 1997 Valnerina sent the Commission certain documents and a summary of the final report on implementation of the project.

18. By letter of 6 March 1998 the Commission informed Valnerina of its intention to carry out an on-the-spot inspection in respect of the implementation of the project.

19. The on-the-spot inspection took place, on Valnerina’s premises, from 23 to 25 March 1998 and on the premises of Route des Senteurs from 4 to 6 May 1998.

20. On 6 April 1998 Valnerina sent the Commission certain documents it had requested during the on-the-spot inspection.

21. On 5 November 1998 Valnerina and Route des Senteurs applied to the Commission for final approval for the project and payment of the balance of the Community contribution.

22. By letter of 22 March 1999 the Commission informed Valnerina that under Article 24 of Regulation No 4253/88, as amended, it had carried out an examination of the financial assistance for the project, and that as that examination had uncovered evidence that pointed to irregularities, it had decided to initiate the procedure provided for in the abovementioned article of Regulation No 4253/88, as amended, and in point 10 of Annex II to the award decision. In that letter, a copy of which the Commission sent to Route des Senteurs, the Commission set out that evidence, specifically as regards the measures for which Valnerina and Route des Senteurs respectively were responsible.

23. On 17 May 1999 Valnerina submitted its observations in response to the Commission’s allegations and gave the Commission certain other documents.

24. By decision of 14 August 2000 addressed to the Italian Republic and Valnerina and notified to the applicant on 21 August 2000 the Commission, under Article 24(2) of Regulation No 4253/88, as amended, withdrew the financial assistance granted for the project and requested that Valnerina repay in full the grant already paid (`the contested decision’).

25. In recital 9 in the preamble to the contested decision the Commission listed 11 irregularities within the meaning of Article 24(2) of Regulation No 4253/88, as amended, 5 of which concerned measures carried out by Route des Senteurs and 6 of which related to measures carried out by Valnerina.

26. By letters of 14 September and 2 October 2000 Valnerina requested Route des Senteurs to repay the sums which it had paid it for the purposes of implementing the project and for which Route des Senteurs was liable. At the same time, Valnerina requested Route des Senteurs to send it information that would establish the incorrect and unlawful nature of the contested decision in order to prepare a joint line of defence.

27. On 20 October 2000 Route des Senteurs replied, in essence, that in its view the contested decision was unjustified.

B – Procedure before the Court of First Instance

28. In the proceedings before the Court of First Instance, Valnerina applied for the disputed decision to be annulled. By its first ground of appeal Valnerina complained that the Commission had requested that it repay the whole of the advances paid out instead of limiting its request to the part of the advances Valnerina had retained. The other pleas related to the individual irregularities the Commission relied upon, the proportionality of the request for repayment and the Commission’s exercise of discretion.

29. In the proceedings before the Court of First Instance, Italy intervened in support of Valnerina.

C – The judgment of the Court of First Instance

30. The Court of First Instance annulled the disputed decision in so far as the Commission did not limit its request for repayment of the assistance to the sums corresponding to the part of the project which, under the award decision, was to be carried out by the applicant itself.

31. In this regard it explained that in principle the Commission was entitled to designate a principal beneficiary to be responsible for repaying the whole amount of the assistance in the case of irregularities. None the less, it was appropriate to take into account the fact that any obligation to repay assistance might entail serious consequences for the parties concerned. Therefore, the principle of legal certainty required that the law applicable to performance of the contract should have been sufficiently clear and specific to have made the parties concerned aware unequivocally of their rights and obligations and take the necessary steps – in the present context, to have agreed before the assistance was awarded on appropriate private law instruments which would protect their financial interests in relation to each other. In this case, however, the terms of the award decision were not sufficiently clear that Valnerina should have expected to bear sole responsibility for repayment of the advances. Thus, demanding Valnerina to repay the entire amount infringed the principle of proportionality.

32. Apart from that the Court of First Instance dismissed the action and ordered the parties to bear their own costs. The Commission had been correct to complain about the evidence of expenditure submitted by Valnerina and had therefore been entitled to request repayment of the part of the advances which Valnerina had retained.

IV – Applications

33. Valnerina submits that the Court should:

– set aside the judgment at first instance in so far as it confirms Decision No 2388 of the Commission of the European Communities of 14 August 2000, and give final judgment on the dispute to the effect that the whole of the disputed decision is annulled;

– order the respondent to pay the costs.

34. The Commission contends that the Court should:

– dismiss the appeal;

– set aside the Judgment of the Court of First Instance of 13 March 2003 in Case T-340/00 in so far as it annuls Commission Decision C(2000) 2388 of 14 August 2000 in so far as ‘the Commission did not limit its demand for repayment of the assistance to the sums corresponding to the part of the project which, under the award decision, was to be carried out by the applicant itself’, and grant the applications it made at first instance in full;

– order the appellant to pay the costs.

35. Italy did not make any submissions in the appeal proceedings.

V – Legal analysis

36. Valnerina supports its appeal on five grounds of appeal.

37. By its first ground of appeal Valnerina complains that the Court of First Instance failed to recognise that the award decision related not to a joint project but to two projects which were to be dealt with completely separately.

38. Following on from that, Valnerina complains in its second ground of appeal that each of the projects had to be reviewed independently. Accordingly, once it had limited repayment to the sums which Valnerina had retained the Court of First Instance should have annulled the decision challenged, since the Commission had not considered whether the irregularities for which Valnerina was responsible justified full repayment of the sums it had retained.

39. The third ground of appeal relates to the finding of the various irregularities which the Commission had alleged against Valnerina.

40. The fourth ground of appeal is directed to alleged procedural flaws in the Commission’s investigations and what Valnerina considered to be a consequential breach by the Court of First Instance of the rights of the defence.

41. Finally, by the fifth ground of appeal Valnerina attacks the Commission for requesting repayment of all of the assistance instead of limiting its request to the amounts affected by the irregularities it had found.

42. The Commission limits its cross-appeal to one ground of appeal. By this ground, the Commission submits that Valnerina should bear sole financial responsibility for the project. The Court therefore erred in law in annulling the decision requesting repayment to the extent that repayment had been requested of sums which had been paid on to Route des Senteurs.

A – Separation of the overall project into two projects

43. Both Valnerina’s first and second grounds of appeal and the Commission’s cross-appeal raise the question as to whether the Court of First Instance analysed the award decision correctly in annulling the disputed decision to the extent that Valnerina had been required to repay the sums which had been paid on to Route des Senteurs. Although this analysis contains matters of fact, in essence it concerns defining the legal effect of the award decision. Accordingly, the findings of the Court of First Instance may be reviewed by the Court to that extent. ( )

44. In the following, the Commission’s cross-appeal shall be considered first, since it raises the fundamental question as to whether Valnerina bears sole financial responsibility for the repayment of the assistance, or whether a distinction may be drawn between Valnerina and Route des Senteurs. There shall then be considered the possibilities arising from, and the limits of, that distinction in the present case in the context of Valnerina’s first two grounds of appeal.

1. The cross-appeal: Valnerina’s sole financial responsibility

45. According to the Commission, the Court of First Instance had not understood that the Commission could have requested repayment of assistance only from the beneficiary of the award decision, that is Valnerina. It had misinterpreted the award decision in so far as it laid down the beneficiary’s rights and obligations. Although the Court of First Instance had dressed up its findings as going to whether the decision requesting repayment had been proportionate, in fact it had assessed the award decision by reference to the principle of legal certainty. Since there had been no discretion as to whether the claim were made against Valnerina or Route des Senteurs, there was no room to apply the principle of proportionality.

46. If the Commission were correct in its view that as a matter of law a request for repayment could have been made only to Valnerina as the formal, named beneficiary, this would have suggested that the request for repayment could not be limited at all. If so, the Court of First Instance’s view would mean that the Commission could no longer request repayment of a part of its award.

47. However, it is not clear why the Commission should be prohibited from requesting repayment of parts of the award from Route des Senteurs. The Court of First Instance correctly emphasised that where assistance is granted for a project which several parties are responsible for carrying out Article 24 of Regulation No 4253/88 does not state from which of those parties the Commission may request repayment of the assistance in the event of irregularities being committed in the implementation of the project by one or more of those parties. ( ) Article 24(3)(1) of Regulation No 4253/88 provides only that any sums paid unduly are to be repaid to the Commission. That expresses the general principle that unjustified enrichment should be returned. Admittedly, the idea of ‘repayment’ implies that the obligor has previously received something. However, that does not preclude the possibility that sums which have been paid on by a project coordinator must be repaid. Moreover, confining liability to a single project participant, as argued for by the Commission, could lead to abuse: spurious beneficiaries could be put forward so that the assistance from Community funds could remain with third parties.

48. It follows that Valnerina could bear sole financial responsibility for the whole project, as per the Commission’s submissions, only if this was clearly stated in the award decision. The Commission submits that when read in context it appears from the individual provisions that the beneficiary, that is Valnerina, was intended to bear sole financial responsibility to the Commission. However, in paragraphs 58 to 64 the Court of First Instance explains convincingly that read as a whole the award decision is not sufficiently clear. Instead, it contains contradictory provisions which in context do not lead to placing the whole financial responsibility on Valnerina.

49. Annex II makes the beneficiary the Commission’s interlocutor, ( ) but the clear division of the award between the two participating bodies responsible for the project and the absence of a clear provision on financial responsibility preclude this from establishing any sole financial responsibility to the Commission. If Route des Senteurs had been intended not to bear any financial responsibility, what, if any, responsibility the award decision imposed upon it for its part of the project would be unclear.

50. The Commission’s submission that its decision could be assessed by reference to the principle of proportionality only in so far as it had a discretion is wrong, and is in any event irrelevant in the present case. The principle of proportionality is to be observed not only by the Commission in exercising its discretion but also in the interpretation of Community law. The Court of First Instance did exactly that in the present case.

51. It follows that the cross-appeal is to be dismissed.

2. The first two grounds of appeal: division of the project into two parts and the joint assessment of the irregularities

52. Like the cross-appeal, these two grounds of appeal concern the question as to the extent to which the two parts of the project should be dealt with jointly. By its first ground of appeal Valnerina submits that there were in fact two projects which were to be dealt with completely separately. In its second ground of appeal Valnerina submits that the decision requiring repayment should at least have been made on the basis of an analysis of the irregularities divided by reference to the responsible bodies. The two grounds of appeal are to be considered together, since by them Valnerina disputes its responsibility for the parts of the project which were to be carried out by Route des Senteurs.

53. By its first ground of appeal Valnerina submits that the Court of First Instance erred in considering its bases of claim relating to infringement of the principles of non-discrimination and proportionality. The Court of First Instance limited itself to financial aspects, and did not consider whether the Community assistance had in fact been granted to two separate projects. Valnerina accordingly submits that by implication the award decision consisted of two decisions which in law were to be considered separately.

54. One might agree with the Commission’s submission that the first ground of appeal is inadmissible because Valnerina has not suffered any loss. Specifically, the Court of First Instance annulled the Commission’s decision on other grounds in so far as it required Valnerina to repay Route des Senteurs’ share.

55. However, the second ground of appeal shows that the Court of First Instance’s reasoning does cause Valnerina prejudice. Valnerina complains that after deciding that Valnerina could not be ordered to repay the funds which went to Route des Senteurs, the Court of First Instance did not annul the whole decision. Instead, Route des Senteurs’ liability having been separated out, it was necessary to determine Valnerina’s liability anew, in particular as regards the proportionality of the sanction for the irregularities established.

56. However, the Court of First Instance expressly held that the Commission was in principle entitled to require repayment of the whole of the advance. ( ) The Court of First Instance accordingly proceeded on the basis that the project was to be considered as a whole, and limited the amount to be repaid by Valnerina only once it reached the stage of considering the remedy.

57. Thus, this second ground of appeal arises only if one accepts the premiss underlying the first ground of appeal, namely that the award was in fact made to two completely separate projects which are to be assessed separately. If this premiss were correct, the Court of First Instance would not have been able to confine itself to limiting Valnerina’s repayment obligation. Instead, the Court of First Instance would have had to regard and review the request for repayment of the part of the award relating to the Italian side of the project as a separate decision. This decision would have been lawful only if in exercising its discretion to request repayment the Commission had considered whether the irregularities in Valnerina’s part of the project in themselves justified the request for the return of the sums awarded for that part.

58. It follows that there must be considered whether the object of the disputed decision was in fact a single project or whether the two parts of the project in Italy and France are to be dealt with separately.

59. Valnerina is correct in its submission that the disputed decision has as its object a project having two parts which were to be expressly carried out by two different responsible bodies. However, the award decision combines these parts into a single project. Combining them has two purposes. On the one hand, it is intended to encourage cooperation between regions in various Member States; on the other, it is intended to concentrate the carrying out of specific administrative tasks in one body responsible for the project, namely Valnerina.

60. The cooperation between the Italian and the French sides corresponds to the general aim of structural policy laid down in Article 158 EC (at the time of the award decision, Article 130a of the EC Treaty) to strengthen economic and social cohesion in order to promote the overall harmonious development of the Community. According to Valnerina’s own submissions, the Commission even made cooperation a condition of the grant of the award. The new version of Article 11(1) of Regulation No 4253/88, as amended by Regulation No 2082/93, which is not yet applicable to the award decision, provides expressly that operations of transnational interest are of significant interest to the Community. The eighth recital to Regulation No 2082/93 states that transnational cooperation is necessary to justify Community measures, in accordance with the principle of subsidiarity. Thus, it may be that two separate projects would not have been eligible for assistance at all.

61. Simplifying the project’s administration by naming an interlocutor (Valnerina) is justified as facilitating the administration of assistance. Likewise, there could be no objection to the Commission’s allocating all of the financial responsibility to that interlocutor, provided this was stated clearly enough to enable the interlocutor to make an informed decision as to whether it wanted to accept this responsibility and, if so, how to protect itself. As the Court of First Instance explained, such an arrangement would be justified in the interests of the effectiveness of Community action as regards both the principle of sound administration and the need for sound financial management of the Community budget. ( )

62. Accordingly, the Court of First Instance was entitled in law to proceed on the basis that the award decision related not to two separate projects but to one single one. In making its decision to request repayment, the Commission too was not obliged to consider the two operations separately, and was entitled to base its decision on an overall consideration of the irregularities. However, in the present case in which two largely separate parts of a project were combined, that does not mean that the responsibility of the individual participants for irregularities and for the success of the parts of the project cannot be taken into account in considering the proportionality of the request for repayment.

63. It follows that the first and second grounds of appeal are to be dismissed.

B – The remaining grounds of appeal

64. The remaining grounds of appeal relate to the findings of irregularities in the part of the operation for which Valnerina was responsible, its involvement in the investigation of the irregularities and the proportionality of the request for repayment of all the sums Valnerina retained.

1. The third ground of appeal: the individual irregularities

65. By its third ground of appeal Valnerina complains that in analysing its objections at first instance to the Commission’s findings of individual irregularities the Court of First Instance applied Article 24 of Regulation No 4253/88 and the award decision wrongly, breached its duty to state reasons and gave reasons that were illogical.

a) The first irregularity: production of a film by ‘Romana Video’

66. The sixth indent of the ninth recital in the preamble to the contested decision reads as follows:

‘[Valnerina] charged “Romana Video”, and declared paid, ITL 98 255 000 (ECU 50 672) for making a video as part of the project. At the time of the inspection (25 and 26 March 1998) there was still ITL 49 000 000 outstanding. [Valnerina] stated that that sum would not be paid because it was the cost of selling the rights in the video to the company which made it. [Valnerina] submitted expenditure ITL 49 000 000 higher than the expenditure actually incurred.’

67. In that regard, the Court held that neither Regulation No 4253/88 nor the award decision expressly prohibits the beneficiary of the assistance from profiting from results obtained due to that assistance. ( ) However, in view of the simultaneity of the transactions and the set-off arrangement between the applicant and Romana Video whilst the project was being carried out, the Commission was justified in considering that, rather than having profited from the result obtained due to the assistance, the applicant only in fact incurred in carrying out that part of the project the cost resulting from that set-off arrangement. The Court considered this to be an irregularity. ( )

68. However, Valnerina submits that it was entitled to set off the costs claimed in full and to sell the rights in the film in a subsequent transaction.

69. The Commission replies that every recipient of a Community subsidy is required to prove its eligible expenditure. Valnerina did not do this in respect of the production of the film.

70. As the Court of First Instance held, Valnerina is correct in its submission that there is no provision which prohibits the results obtained due to the assistance from being used to make a profit. However, Valnerina does not dispute that as a matter of law the effect of Article 3(2) of the award decision is that assistance may be granted only to the extent that eligible expenditure is incurred. The only profits which are not deemed to reduce costs are those from transactions at arm’s length, not those from fictitious transactions whose only purpose is to inflate costs.

71. Whether the present case involved an arm’s length or a fictitious transaction is a question of fact. The Court’s review of this on appeal is restricted to whether the evidence adduced has been distorted. ( ) However, Valnerina does not submit that any evidence has been distorted.

72. The Court can also review whether the Court of First Instance has breached its duty to state reasons. Valnerina’s submissions seem to be to the effect that the reasoning of the Court of First Instance was contradictory in so far as the Court of First Instance recognised the possibility of making a profit out of the results obtained due to the assistance, but none the less agreed with the Commission in regarding the sale of the film rights as decreasing the costs. However, the Court of First Instance stated why it proceeded on the basis that the transaction was not at arm’s length, namely because the Commission was entitled to conclude from the simultaneity of the transactions that the costs were reduced correspondingly. ( ) This finding is plausible. That it was possible that there was a lawful, arm’s length transaction does not mean that the transaction in question was in fact at arm’s length.

b) The second irregularity: staff costs

73. The seventh indent of the ninth recital in the preamble to the contested decision reads as follows:

‘[Valnerina] charged ITL 202 540 668 (ECU 104 455) to the project, representing the costs of employing five persons on the “tourist information” part of the project. [Valnerina] failed to submit supporting documents (contracts of employment, details of activities performed) in respect of that expenditure.’

74. Furthermore, the ninth indent of the ninth recital in the preamble to the contested decision reads as follows:

‘[Valnerina] declared ITL 152 340 512 (ECU 78 566) in respect of staff costs in connection with “activities other than tourist information”. [Valnerina] did not submit documents to show that the services were actually provided or that [they] were directly linked to the project.’

75. In that regard the Court of First Instance held that the Commission did not commit an error in considering that the applicant did not submit supporting documents to it which would establish that the staff costs charged to the project related directly to its implementation and were appropriate. ( )

76. Valnerina considers that it did submit sufficient evidence, in the form of tables with the names of the persons concerned, an assessment of the time spent by those persons on the project, their wages, and the resulting expenditure in respect of the implementation of the project. In any event, the costs specified were justified by the fact that the project had been completed.

77. However, on this point reference must again be made to the fundamental principle of Community assistance that the Community can subsidise only expenditure actually incurred. The Court of First Instance was correct also to refer to point 3 of Annex II to the award decision, according to which, ‘staff costs … must relate directly to, and be appropriate to, the implementation of the measure’. ( ) Thus, proof that a project has been implemented is not enough to justify specific assistance. Instead, the recipient of the assistance must prove actual staff costs which satisfy the conditions of the assistance.

78. Whether the evidence submitted by Valnerina in respect of staff costs satisfies these requirements is a matter of fact which the Court cannot review. ( )

79. In paragraphs 91 to 93 the Court of First Instance gave sufficient reasons for its finding that the staff costs had not been sufficiently vouched. There it explained that Valnerina’s evidence did not prove that the staff costs arose in connection with the project and did not enable any assessment of whether they were appropriate.

c) The third irregularity: overheads

80. The tenth indent of the ninth recital in the preamble to the contested decision reads as follows:

‘[Valnerina] charged ITL 31 500 000 (ECU 26 302) to the project, representing overheads (rental of two offices, heating, electricity, water and cleaning). That allocation was not supported by any type of document.’

81. The Court of First Instance stated that the irregularity established by the Commission with regard to the overheads only related to some of the costs which Valnerina had charged to the project under that heading. The costs concerned were only those relating to the use for the project of premises which the applicant had already occupied before the assistance was awarded. ( ) It held that the Commission could quite properly conclude that Valnerina would have borne the expenditure in any case. Taking it into account therefore constituted an irregularity. ( )

82. Valnerina restricted its complaint to being that in this regard the Court of First Instance held that the Commission was entitled to make an assumption, whereas it should have required it to be proved that the costs had not in fact been incurred. However, this complaint too relates to the establishment and assessment of facts, which cannot be reviewed in appeal proceedings. ( )

d) The fourth irregularity: consultancy contract with Mauro Brozzi

83. In the eighth indent of the ninth recital in the preamble to the contested decision the Commission notes as follows:

‘[Valnerina] charged ITL 85 000 000 (ECU 43 837) to the project, representing the costs for consulting Mauro Brozzi Associati S.A.S. That expenditure was not supported by any documents which made it possible to establish the existence and the precise nature of the services provided.’

84. In that regard the Court of First Instance held that despite the Commission’s express request, Valnerina did not produce the evidence sought. ( ) For that reason the Commission’s decision was correct.

85. However, Valnerina is of the view that this did not permit the conclusion that there was any serious irregularity.

86. However, Valnerina thereby fails to recognise that, as already explained, point 3 of Annex II to the award decision provides that expenditure is eligible only if it relates directly to, and is appropriate to, the implementation of the measure. ( ) Claiming for expenditure in respect of which that has not been proved is accordingly an irregularity.

e) The fifth irregularity: the irrigation system

87. In the eleventh indent of the ninth recital in the preamble to the contested decision the Commission notes as follows:

‘[A]s part of the “cultivation of spelt wheat and truffles” operation, the [award decision] provided for making investment in order to improve irrigation systems for the cultivation of truffles, amounting to ECU 41 258. That investment was not made and no explanation in that regard was provided to the Commission.’

88. In that regard the Court of First Instance held that Valnerina had not submitted any documents supporting these costs, with the consequence that they could not be taken into account.

89. Valnerina claims that in this connection the Court of First Instance did not take into account a report which Valnerina had submitted. Nor was the Court of First Instance entitled to complain if, years after the implementation of an experimental backup irrigation system by third parties for dry summers, Valnerina was no longer able to prove it had incurred expenditure.

90. So far as the expert report is concerned, it is clear, first, that the term ‘back-up irrigation systems’ used in the context of that specific project should be understood in the sense indicated by Valnerina and, second, that the costs incurred provided for were adjusted in the light of the cost contributions usually applying in respect of EAGGF operations. However, that is not the point. The Court of First Instance left open the question which measures the award decision required to be implemented.

91. The Court of First Instance based its decision solely on the fact that the measures allegedly implemented had not been proved. As already explained, only expenditure which is proved is eligible. ( ) As regards any difficulties in providing evidence, point 6 of Annex II to the award decision requires the recipient of the award to keep all documents and to make them available to the Commission. If Valnerina did not have the necessary documents, it was not entitled to claim the expenditure.

f) Interim conclusion on the third ground of appeal

92. For those reasons the third ground of appeal is to be dismissed.

2. The fourth ground of appeal: breach of the rights of the defence

93. By this ground of appeal Valnerina claims that the Court of First Instance breached the rights of the defence, in that the Court of First Instance did not object to alleged procedural errors in the Commission’s inspection. In particular, no record was taken of the inspection and no list was drawn up of documents which had been photocopied.

94. This ground of appeal is inadmissible, because Valnerina does not identify which parts of the judgment of the Court of First Instance it takes issue with, but instead merely repeats arguments it made at first instance. The Court of First Instance dismissed the relevant plea, because apart from the inspection Valnerina had had sufficient opportunity to make observations on the Commission’s allegations. The ground of appeal does not address this point.

3. The fifth ground of appeal: proportionality of the request for repayment

95. By its fifth ground of appeal Valnerina complains that the Court misunderstood the requirement in Article 24(2) of Regulation No 4253/88 that sanctions should correspond to the misconduct. The irregularities alleged against Valnerina were of a purely formal nature. They had barely been proved. Valnerina could not be accused of having provided false information or of any concealment, but only of having provided insufficient evidence. For that reason it was disproportionate to annul the award decision and to request repayment of all of the advances. Valnerina made this submission also in respect of its third ground of appeal.

96. On this point the Court of First Instance held that implementing development policy justified imposing strict formal requirements on calculating expenditure and that irregularities established on that basis would justify requiring Valnerina to repay the assistance it had received. ( )

97. The Court of First Instance based this decision on legally sound considerations. Article 24(2) of Regulation No 4253/88 expressly provides that the Commission may reduce or suspend assistance if there is an irregularity or a significant change affecting the nature or conditions for the implementation of the operation or measure for which the Commission’s approval has not been sought. It follows that the Commission is not required to request repayment of the financial assistance in full, but has a discretion as to whether it requests repayment of any money at all and, if so, in what amount. The principle of proportionality requires the Commission to exercise this discretion so that the amounts required to be repaid are not disproportionate to the irregularities. However, the Commission is not limited to requiring repayment of only such amounts as the irregularities show are not justified. Instead, the aims of effective administration of Community assistance and of discouraging fraud can justify requiring repayment of assistance only part of which is affected by irregularities. ( )

98. Whether in the present case, in which the irregularities affected 30% of the expenditure provided for, the Commission was entitled to require repayment of all the assistance allocated to Valnerina depends on the nature and the extent of the misconduct. Accordingly, it too is a question of the finding and assessment of facts, which cannot be reviewed in appeal proceedings. ( )

99. Accordingly, the fifth ground of appeal is to be dismissed.

VI – Costs

100. Under Article 122 in conjunction with Articles 118 and 69(3) of the Rules of Procedure, where each party succeeds on some and fails on other heads the Court may order that the costs be shared or that the parties bear their own costs. In the present case both parties’ appeals are unsuccessful. Both appeals have approximately the same value. Accordingly, both parties should bear their own costs.

VII – Conclusion

101. For those reasons, I submit that the Court should decide as follows:

1. The appeal and the cross-appeal are dismissed.

2. The parties shall bear their own costs.