JUDGMENT OF THE COURT (First Chamber)
28 May 1998 (1)
(Tax provisions Harmonisation of laws Turnover taxes Common system ofvalue added tax Sixth Directive Scope Supply of counterfeit perfumeproducts)
In Case C-3/97,
REFERENCE to the Court under Article 177 of the EC Treaty by the Court ofAppeal (England and Wales) Criminal Division for a preliminary ruling in thecriminal proceedings before that court against
John Charles Goodwin,
Edward Thomas Unstead,
on the interpretation of Sixth Council Directive 77/388/EEC of 17 May 1977 on theharmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment (OJ 1977 L 145,p. 1),
THE COURT (First Chamber),
composed of: M. Wathelet, President of the Chamber, D.A.O. Edward and P. Jann(Rapporteur), Judges,
Advocate General: P. Léger,
Registrar: H. von Holstein, Deputy Registrar,
after considering the written observations submitted on behalf of:
Mr Goodwin and Mr Unstead, by Alan Newman QC and Peter Guest,Barrister, instructed by Audrey Oxford, Solicitor, acting for Mr Unstead,
the United Kingdom Government, by John E. Collins, Assistant TreasurySolicitor, acting as Agent, with Stephen Richards and Mark Hoskins,Barristers,
the Greek Government, by Fokion Georgakopoulos, Legal Adviser to theState Legal Service, acting as Agent, and Anna Rokofyllou, Adviser to theDeputy Minister for Foreign Affairs, acting as Agents,
the Commission of the European Communities, by Hélène Michard andBarry Doherty, of its Legal Service, acting as Agents,
having regard to the Report for the Hearing,
after hearing the oral observations of Mr Goodwin and Mr Unstead, representedby Alan Newman QC and Peter Guest, the United Kingdom Government,represented by John E. Collins, with Kenneth Parker QC and Mark Hoskins, theGreek Government, represented by Fokion Georgakopoulos and Anna Rokofyllou,and the Commission, represented by Barry Doherty, at the hearing on 15 January1998,
after hearing the Opinion of the Advocate General at the sitting on 12 March 1998,
gives the following
Judgment
- 1.
- By judgment of 24 December 1996, received at the Court on 9 January 1997, theCourt of Appeal (England and Wales) Criminal Division referred to the Court fora preliminary ruling under Article 177 of the EC Treaty a question on theinterpretation of Sixth Council Directive 77/388/EEC of 17 May 1977 on theharmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment (OJ 1977 L 145,p. 1; hereinafter 'the Sixth Directive).
- 2.
- That question was raised in criminal proceedings against Mr Goodwin and MrUnstead, who were charged with the fraudulent evasion of VAT in respect of salesof counterfeit perfume products.
- 3.
- According to the documents before the Court, Mr Goodwin was accused of havingpurchased counterfeit perfume products and of having sold them without beingregistered for VAT. Mr Unstead was accused of having participated in themanufacture, production, distribution and sale of counterfeit perfume productsthrough a business organisation which he ran together with other persons, andwhich was not registered for VAT.
- 4.
- At first instance, the case came before the Inner London Crown Court, which heldthat the Sixth Directive did not preclude the charging of VAT on the manufacture,production, distribution and sale of counterfeit perfume products, and found bothdefendants guilty of conduct contrary to section 72(1) and (8) of the Value AddedTax Act 1994.
- 5.
- Mr Goodwin and Mr Unstead have appealed against that decision to the Court ofAppeal, arguing inter alia that Community law precludes the levying of VAT in asituation such as theirs.
- 6.
- The Court of Appeal believes that, as a matter of Community law, VAT is payableon supplies of counterfeit perfume products for consideration. However, beingsomewhat doubtful on the point, it stayed proceedings in order to refer thefollowing question to the Court of Justice for a preliminary ruling:
'Does the supply of counterfeit perfume products fall within the scope of CouncilDirective 77/388/EEC of 17 May 1977 on the harmonisation of the laws of theMember States relating to turnover taxes (the Sixth Directive)?
- 7.
- The crux of the question is whether, on a proper construction of Article 2 of theSixth Directive, VAT is payable on the supply of counterfeit perfumes.
- 8.
- Article 2 of the Sixth Directive provides:
'The following shall be subject to value added tax:
1. The supply of goods or services effected for consideration within theterritory of the country by a taxable person acting as such;
2. The importation of goods.
- 9.
- It should be borne in mind at the outset that, according to established case-law, theSixth Directive, whose purpose is to achieve widespread harmonisation in the areaof VAT, is based on the principle of fiscal neutrality. As regards the levying of
VAT, that principle precludes a generalised differentiation between lawful andunlawful transactions, except where, because of the special characteristics of certainproducts, all competition between a lawful economic sector and an unlawful sectoris precluded (see inter alia Case C-111/92 Lange v Finanzamt Fürstenfeldbruck[1993] ECR I-4677, paragraph 16).
- 10.
- Referring to a number of judgments Case 294/82 Einberger v HauptzollamtFreiburg [1984] ECR 1177, Case 269/86 Mol v Inspecteur der Invoerrechten enAccijnzen [1988] ECR 3627, Case 289/86 Happy Family v Inspecteur derOmzetbelasting [1988] ECR 3655 and Case C-343/89 Witzemann [1990] ECR I-4477 Mr Goodwin and Mr Unstead submit that, since there is no lawful market incounterfeit perfumes, the present case falls within the scope of that exception. Inthe United Kingdom, not only would a contract for the sale of counterfeit perfumesbe void for illegality, but such sales would also infringe a wide variety of intellectualproperty rights. Furthermore, the placing of such products on the market seriouslyundermines the functioning of the common market inasmuch as, unlike narcotics,trade in counterfeit perfumes is never permitted.
- 11.
- In Einberger, Mol and Happy Family, the Court ruled that no turnover tax arisesupon the unlawful importation into the Community of drugs or upon the unlawfulsupply of similar products effected for consideration within a Member State, in sofar as the products in question are not confined within economic channels strictlycontrolled by the competent authorities for use for medical and scientific purposes. In paragraph 20 of Witzemann, the Court held that its reasoning in relation to theillegal importation of drugs applies a fortiori to imports of counterfeit currency.
- 12.
- In those four judgments, the Court added that unlawful imports or supplies ofgoods such as those at issue in those cases, release of which into the economic andcommercial channels of the Community is by definition absolutely precluded andwhich can give rise only to penalties under the criminal law, are wholly alien to theprovisions of the Sixth Directive (Einberger, paragraphs 19 and 20; Mol, paragraph15; Happy Family, paragraph 17; and Witzemann, paragraph 19). That line of case-law thus concerns goods which, because of their special characteristics, may not beplaced on the market or incorporated into economic channels.
- 13.
- However, that is not the position here. As the Greek Government, the UnitedKingdom Government and the Commission emphasised, the goods at issue in themain proceedings are not goods which cannot be placed on the market because oftheir intrinsic nature or special characteristics.
- 14.
- As the Advocate General pointed out in point 22 of his Opinion, althoughtransactions involving counterfeit products infringe intellectual property rights, anyconsequential prohibition is not linked to the nature or essential characteristics ofsuch products, but to their detrimental impact on the rights of third parties. Similarly, as the Commission noted in its observations, the prohibition oncounterfeit products, which stems from the fact that they infringe intellectual
property rights, is conditional, not absolute as in the case of narcotics or counterfeitcurrency. That prohibition is not sufficient, therefore, to place trade in suchproducts outside the scope of the Sixth Directive.
- 15.
- Furthermore as the Commission also pointed out the possibility of competitionbetween counterfeit products and goods which are lawfully traded cannot be ruledout in a case such as that before the national court, in so far as there is a lawfulmarket in perfume products on which counterfeit goods have a specific impact. Accordingly, such goods cannot, like narcotics or counterfeit currency, be regardedas extra commercium.
- 16.
- It must therefore be stated in reply to the question referred that, on a properconstruction of Article 2 of the Sixth Directive, VAT is payable on the supply ofcounterfeit perfumes.
Costs
- 17.
- The costs incurred by the Greek and United Kingdom Governments and theCommission of the European Communities, which have submitted observations tothe Court, are not recoverable. Since these proceedings are, for the parties to themain action, a step in the proceedings pending before the national court, thedecision on costs is a matter for that court.
On those grounds,
THE COURT (First Chamber),
in answer to the question referred to it by the Court of Appeal (England andWales) Criminal Division by judgment of 24 December 1996, hereby rules:
On a proper construction of Article 2 of Sixth Council Directive 77/388/EEC of 17May 1977 on the harmonisation of the laws of the Member States relating to
turnover taxes Common system of value added tax: uniform basis of assessment,VAT is payable on the supply of counterfeit perfumes.
Delivered in open court in Luxembourg on 28 May 1998.
R. Grass
M. Wathelet
Registrar
President of the First Chamber