OPINION OF ADVOCATE GENERAL

SIR GORDON SLYNN

delivered on 6 March 1985

My Lords,

In the present proceedings the Commission seeks a declaration that by applying to imported sparkling wines a higher rate of value added tax than that applied to Italian sparkling wines, Italy is in breach of Article 95 of the EEC Treaty.

After Decree-Law No. 495 of 4 August 1982 (GU 212 of 4.8.1982) came into force, the tax structure was as follows :

— the rate of 10% applied to sparkling wines not bearing a label to the effect that they had been fermented naturally in their bottles;

— wines which had been naturally fermented in their bottles were taxed at 18% where this procedure was not required by the legislation of the producing country;

— wines which had an appellation of origin and which had undergone natural fermentation in their bottles were taxed at 38%, when this procedure was required by the legislation of the producing State.

On 21 September 1982 the Commission sent a notice to the Italian Government in accordance with Article 169, claiming that the legislation as it existed at that time was contrary to Article 95. That letter requested the Italian Government to submit its observations within two months. By telex dated 17 December 1982, the latter asked the Commission to extend the deadline by two months but it never replied on the substance of the Commission's letter. Accordingly, on 22 September 1983 the Commission forwarded a reasoned opinion requiring the Italian Government to bring the alleged infringement to an end within one month. Since the Italian Government did not comply with this reasoned opinion, the Commission lodged its application with the Court on 14 December 1983.

Subsequent to that date the position was changed by Decree-Law No. 232 of 15 June 1984 (GU 166 of 18.6.1984), which the Italian Government annexed to its rejoinder. Article 2 (2) of that instrument recast the tax structure so as to remove or substantially remove such discrimination as might exist. However, when that Decree-Law was converted into a Law, Article 2 (2) was struck out (Law No. 408 of 28 July 1984, GU 212 of 2.8.1984). As I understand it, the three-tier structure which I have described was thereby reintroduced. What is more, it would seem that the most recent relevant legislation, namely Decree-Law No. 853 of 19 December 1984 (GU 347 of 19.12.1984), has not-removed the basic discrimination which is alleged to exist.

The lowest rate of tax applies to wines fermented in closed vats, such as Asti Spumante which accounts for some 50% of Italian production of sparkling wines. The middle rate of tax applies to all those Italian sparkling wines which are not in the lowest category. Since Italian legislation does not require any sparkling wine to be fermented in bottles, the highest rate of tax can never apply to any domestically produced wine. By contrast champagne made in the Champagne region of France, which is required by law to be fermented in bottle, falls into the highest category. At the hearing counsel for the Italian Government was not able to say whether any other sparkling wines fall into the highest category, though he thought that they probably did not.

The argument in this case has principally centred on the allegedly discriminatory effect of the highest tax rate. It has not been shown or really contended that there is any discrimination arising from the use of the intermediate tax rate. In my view, despite the wide terms of the declaration sought by the Commission, it is neither necessary, desirable nor indeed possible to consider whether it is justifiable to introduce a higher rate for sparkling wines produced by natural fermentation in their bottles (where that is not required by legislation) than for other sparkling wines not so produced. I consider only the alleged discriminatory effect of the highest tax rate.

The Italian Government defends this higher tax on the basis that luxury goods can be taxed at higher rates since they are consumed by those who can afford to pay for them, who must be taken to be able to pay, and who should on social grounds pay, higher taxes. Moreover, since the consumption of luxury goods is in limited quantities by those who can afford to pay, it is unlikely to be affected by increases in taxation. This higher taxation is permissible not only under Italian law but under Community law as the Court recognised in Case 319/81 Commission v. Italy (1983) ECR 601. Such a tax would only violate Article 95 of the EEC Treaty if the reason for adopting it was to distinguish goods by their place of origin rather than on objective grounds. Wines with an appellation of origin which are fermented in bottles such as French champagne are not just bought for their usefulness in quenching thirst. They have a particular social prestige, are used as a status symbol and are thereby clearly to be classified as luxury goods. This is borne out by the fact that buyers pay far more for French champagne in Italy than for other sparkling wines. Their price is indeed so high that a higher rate of tax will not affect their competitiveness.

The Commission, on the other hand, supported in the result by the French Government, contends that this is clearly a tax which violates Article 95. It is enough to show, for a product to be ‘similar’ for the purposes of the first paragraph of Article 95, that it has, from the consumer's point of view, comparable features and that it satisfies the same needs. The question is whether it provides an alternative choice. The highest rate of tax covers in this case only imported wines. The Community Regulations define sparkling wine as such and there exists a homogeneous group of such wines which satisfy the same needs. There is no objective difference between champagne and other sparkling wines which can justify this tax differential. To distinguish by the existence of an appellation of origin and of a legislative obligation to make the wine by natural fermentation in bottle is not such a justification, not least since the absence of the requirement of an appellation of origin and of such an obligation in Italy is due to the policy of the Italian legislature.

The French Government stresses that sparkling wines constitute one category of wine and that they are in competition with each other whether or not they are subjected to an appellation of origin or to rules of manufacture. The effect of the highest tax has been to reduce imports of French champagne into Italy from 8.7 million bottles in 1980 to 3.7 million bottles in 1983.

In my opinion the Court has clearly recognised that Member States have the right to tax some consumer goods, ‘particularly those regarded as luxury products’, more heavily (Case 319/81 at paras 14 and 21). That right may exist even if the luxury goods are imported entirely from other Member States (Cases 140/79 Chemial and 46/80 Vinal (1981) ECR 1 and 77).

On the other hand such a right is subject to the overriding requirement that the provisions of Article 95 are fully observed. The fact that goods are highly taxed because of the contributive capacity of the consumer, or that the goods are said to be luxury goods does not in itself provide an answer to an allegation that Article 95 has been breached.

The Italian Government is in my view entitled to say that ‘champagne’ from the French region has a particular reputation and status. It is easy to exaggerate the ‘homogeneity’ of sparkling wines relied on by the Commission and the French Government, not least if the efforts of French producers in national proceedings to protect the use of the word ‘champagne’ are borne in mind.

On the other hand, on the evidence it seems to me impossible to say that there is such a gap between French champagne and all other sparkling wines which are naturally fermented in their bottles, without being required to be so produced by the national legislation of their country of manufacture, that champagne must be set apart in a luxury category not shared by any of such wines as fall into the middle category.

In the first place I am prepared to accept that price may be a relevant factor in deciding whether a product is a luxury product. The Italian Government's evidence was that the prices of French champagne and Italian sparkling wine were respectively LIT 18200 and LIT 8500 net of VAT. On the other hand the evidence of the Commission shows that the price before tax was not so very different. Bottles of French champagne were found in Rome and Milan at LIT 14500 and of Italian champagne at LIT 12300 and LIT 13100 respectively net of VAT. Bottles may have been found at all these figures, but the Commission's evidence makes it impossible to say that there is universally a wide differential such as relied on by the Italian Government between champagne and all other sparkling wines.

Secondly, it seems to me clear that the methods of manufacture adopted for the middle and higher tax categories are or may be the same. The existence of a legislative obligation to adopt a particular method and the existence of an appellation of origin do not seem to me of themselves sufficient to justify a distinction between the two products. Indeed if the products are otherwise similar, such a distinction can rarely be justified if the Member State imposing the tax has not introduced legislation or systems of appellation of origin which are ever applicable to its own products. If those are the main or sole criteria for making the distinction between the middle and higher rates they are almost bound to create protection for the Member State's national products as against the products of other Member States.

As the Court put it in Case 319/81 at para. 17 ‘Such a system has the effect of excluding domestic products in advance from the heaviest taxation since they will never fulfil the conditions in which the higher rate is charged and it is entirely at the discretion of the national legislature, in choosing not to introduce a general system applicable to all spirits, to perpetuate that system indefinitely’. It will only be otherwise where there are genuine differences ‘in conditions of production, quality, price or competition between national products and those imported from other Member States’.

Thirdly, the Court has evidence of technological developments in winemaking which suggest that the quality of wines not fermented in bottles has increased and may be increasing so that it is not possible to distinguish quality abruptly according to the method used. This seems to me to be so a fortiori if the method of manufacture of the middle and higher taxed goods is the same. Moreover there is no necessary link between the existence of an appellation of origin and the use of the Champenoise method, since in Italy wines made by this method do not have an indication of origin.

This evidence goes to support what would probably be regarded by most wine drinkers as commonplace that even if sparkling wines are not a completely homogeneous category, there are some which do not emanate from Champagne which have sufficient qualities and features in common with champagne for them to be regarded as broadly similar, as potential substitutes and therefore as in competition.

The fact that champagne is subject to the same rate of VAT in France as other sparkling wines, even though subject to a small differential in regard to circulation tax (of 32 centimes per litre) also goes to suggest that the product is not regarded as being in a luxury class apart.

If products are made, broadly, by the same process, having the same intrinsic characteristics and being put to the same use, they are in my view to be treated prima facie as in competition. The mere fact that one of such products has a higher prestige value than the others does not ipso facto put it in a class apart, as the Italian Government appears to argue, any more than does the existence of a system of manufacture which is required by legislation rather than one which is voluntary. In cases where a product not produced in a Member State is put in a luxury class by that State for taxation purposes, particular care has to be taken to ensure that it really is different from other products made in the Member State, as otherwise it is too easy for Article 95 to be breached. This care is particularly needed if one of the purposes of creating a common market is ‘to eliminate such entrenchment of habits of consumption by ensuring that all consumers have as far as possible equal access to all Community products’ (Case 319/81 at para. 20).

In my opinion in the present case the Commission has established that the differential in taxation in respect of champagne does afford indirect protection to other products and is a taxation in excess of that imposed on similar domestic products.

I consider accordingly that the Commission is entitled to a declaration that by applying in Decree-Law No. 495 of 4 August 1982 (GU 212 of 4.8.1982) a higher rate of tax to sparkling wines which have been naturally fermented in their bottles, where such wines have an appellation of origin and where the fermentation procedure is required by the legislation of the producing State, the Italian Republic has failed to fulfil its obligations under Article 95 of the EEC Treaty as far as products imported from other Member States are concerned.

I consider also that the Republic of Italy should pay the Commission's costs.