JUDGMENT OF THE COURT (Sixth Chamber)

16 September 1999 (1)

(Failure of a Member State to fulfil obligations — Imports and acquisitions ofarmaments — Sixth VAT Directive — National legislation not complyingtherewith)

In Case C-414/97,

Commission of the European Communities, represented by Miguel Díaz-Llanos LaRoche, Legal Adviser, and Carlos Gómez de la Cruz, of its Legal Service, actingas Agents, with an address for service in Luxembourg at the office of the latter,Wagner Centre, Kirchberg,

applicant,

v

Kingdom of Spain, represented by Nuria Díaz Abad, Abogado del Estado, actingas Agent, with an address for service in Luxembourg at the Spanish Embassy, 4-6Boulevard E. Servais,

defendant,

APPLICATION for a declaration that, by exempting from value added tax intra-Community imports and acquisitions of arms, ammunition and equipmentexclusively for military use, other than the aircraft and warships mentioned in points23 and 25 of Annex F to Sixth Council Directive 77/388/EEC of 17 May 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 (OJ 1977 L 145,p. 1), notwithstanding the provisions of Articles 2(2), 14, 28a and 28c(B) of thatdirective, the Kingdom of Spain has failed to fulfil its obligations under the ECTreaty,

THE COURT (Sixth Chamber),

composed of: P.J.G. Kapteyn, President of the Chamber, G. Hirsch andJ.L. Murray (Rapporteur), Judges,

Advocate General: A. Saggio,

Registrar: R. Grass,

having regard to the report of the Judge-Rapporteur,

after hearing the Opinion of the Advocate General at the sitting on 18 March 1999,

gives the following

Judgment

1.

    By application lodged at the Court Registry on 5 December 1997, the Commissionof the European Communities brought an action under Article 169 of the ECTreaty (now Article 226 EC) for a declaration that, by exempting from value addedtax (hereinafter 'VAT‘) intra-Community imports and acquisitions of arms,ammunition and equipment exclusively for military use, other than the aircraft andwarships mentioned in points 23 and 25 of Annex F to Sixth Council Directive77/388/EEC of 17 May 1977 on the harmonisation of the laws of the MemberStates relating to turnover taxes — Common system of value added tax: uniformbasis of assessment (OJ 1977 L 145, p. 1, hereinafter 'the Sixth Directive‘),notwithstanding the provisions of Articles 2(2), 14, 28a, and 28c(B) of that directive,the Kingdom of Spain has failed to fulfil its obligations under the EC Treaty.

2.

    Under the Sixth Directive, the following are subject to VAT:

—    the supply of goods or services effected for consideration within the territoryof the country by a taxable person acting as such (Article 2(1));

—    the importation of goods (Article 2(2));

—    intra-Community acquisitions of goods (Article 28a inserted by CouncilDirective 91/680/EEC of 16 December 1991 supplementing the commonsystem of value added tax and amending Directive 77/388/EEC with a viewto the abolition of fiscal frontiers (OJ 1991 L 376, p. 1)).

3.

    Article 14 of the Sixth Directive lists exemptions on importation. Article 28c(B)(inserted by Directive 91/680) lists exempt intra-Community acquisitions of goods.

4.

    Under the provisions of the Act concerning the conditions of accession of theKingdom of Spain and the Portuguese Republic and the adjustments to theTreaties (OJ 1985 L 302, p. 23, hereinafter 'the Act of Accession‘), the SixthDirective is applicable to Spain, with the exception of the Canary Isles, Ceuta andMelilla.

5.

    Under Law No 6/87 of 14 May 1987 concerning budgetary appropriations forinvestments and operating costs of the armed forces (BOE of 19 May 1987,hereinafter 'the Spanish Law‘), imports into Spain of products from other MemberStates, including supplies of armaments, munitions and equipment exclusively formilitary use are exempt from VAT with retrospective effect from 1 January 1986.

6.

    Under the Spanish Law, the Kingdom of Spain does not impose VAT on certainintra-Community imports and acquisitions of goods, which, according to theCommission, should be subject to it since no exemption is provided for either byArticles 14 and 28c of the Sixth Directive or by the Act of Accession.

7.

    Taking the view that this exemption was contrary to Article 2(2) of the SixthDirective, the Commission, by letter of 7 February 1990, gave the SpanishGovernment formal notice to submit its observations within two months.

8.

    The Spanish authorities replied by letter of 7 May 1990. The Commission none theless considered that, despite the arguments raised by the Spanish authorities, theintroduction of the exemption at issue into the Spanish legal order constituted aninfringement of the provisions of the Sixth Directive.

9.

    Having found, however, that since 1 January 1993 the Kingdom of Spain wasentitled, under Directive 91/680, to exempt from VAT certain transactions relatingto aircraft and warships mentioned in points 23 and 25 of Annex F to the SixthDirective, the Commission took the view that, although the Kingdom of Spain hadinfringed that directive as regards military equipment until 1 January 1993, thatinfringement ceased thereafter in respect of the equipment mentioned in points 23and 25 of that annex.

10.

    On 6 August 1996, the Commission sent the Kingdom of Spain a reasoned opinioncalling on it to take the necessary measures to comply therewith within two monthsof its notification.

11.

    By letter of 16 June 1997, the Kingdom of Spain replied to that opinion, essentiallyreiterating its position.

12.

    In the light of the evidence furnished by the Spanish authorities, the Commission,taking the view that the Kingdom of Spain had not complied with the reasonedopinion, brought this action.

13.

    The Commission argues that, under the Sixth Directive, all intra-Communityimports and acquisitions of goods are subject to VAT. There are three situationsin which there is no VAT liability: first, in the case of the exemptions listedexhaustively in Articles 14 or 28c of the Sixth Directive; second, in cases coveredby Article 28(3) of that directive, which allows a temporary exemption to beapplied during the transitional period mentioned in Article 28(4); and, finally, incases where an exemption is provided for by the Act of Accession.

14.

    The Commission maintains that Articles 14 and 28c contain a list of the exemptionswhich the Member States must — or may — allow. In its view, no exemption relatingto armaments, munitions or equipment exclusively for military use, such as thatprovided for by the Spanish Law, appears in that list.

15.

    The Commission takes the view that the Act of Accession required the Kingdomof Spain to bring into force the measures necessary to comply with directives fromthe time of its accession. It points out that the Kingdom of Spain introduced VATby Law No 30/85 of 2 August 1985 (BOE of 9 August 1985), which took effect on1 January 1986.

16.

    The Commission considers that, at the time of the introduction of VAT, theKingdom of Spain had thus made provision for the imposition of the tax on allintra-Community imports or acquisitions of military equipment and that theexemption of such transactions was only decided on more than a year later withretrospective effect from the date on which VAT was first levied in Spain.

17.

    The Kingdom of Spain submits that its national legislation complies withCommunity law, and, in particular, with Article 223(1)(b) of the EC Treaty (now,after amendment, Article 296(1)(b) EC), which provides for a safeguard clausewhereby Member States may take the measures they consider necessary for theprotection of the essential interests of their security which are connected with theproduction of or trade in arms, munitions and war material. It notes that theSpanish Law, extended by Law No 9/90, must be understood as having beenadopted on the basis of that article, since exemption from VAT constitutes anecessary measure for the purposes of guaranteeing the achievement of theessential objectives of its overall strategic plan and, in particular, to ensure theeffectiveness of the Spanish armed forces both in national defence and as part ofthe North Atlantic Treaty Organisation.

18.

    As a preliminary matter, the Commission observes that the plea raised by theKingdom of Spain in its defence is out of time since it was not advanced at anytime during the pre-litigation procedure. It points out that, according to the case-law of the Court, the allegations made by the Commission against a Member Statemust be the same during the different stages of the procedure, the Commissionbeing entitled only to add further details in support of its argument. TheCommission submits that such a requirement is applicable mutatis mutandis in thiscase.

19.

    In that connection, suffice it to note that such a requirement would be contrary tothe general principle of respect for the rights of the defence. According to the case-law of the Court, the proper conduct of the pre-litigation procedure constitutes anessential guarantee required by the Treaty not only in order to protect the rightsof the Member State concerned, but also to ensure that any contentious procedurewill have a clearly defined dispute as its subject-matter (see the order of 11 July1995 in Case C-266/94 Commission v Spain [1995] ECR I-1975, paragraph 17).Thus, once the subject-matter has been defined, the Member State has the rightto raise all the pleas available to it in order to defend itself. Moreover, there is norule of procedure which requires the Member State concerned to put forward,during the pre-litigation procedure, all the arguments in its defence, in anapplication based on Article 169 of the EC Treaty.

20.

    The Commission takes the view that, in so far as it constitutes an exception to therule regarding VAT liability, the measure which the Kingdom of Spain adoptedpurportedly because it was 'necessary‘, on the basis of the safeguard clause inArticle 223(1)(b) of the Treaty, must be interpreted strictly. The Commissionargues that it was for the Kingdom of Spain to establish to what extent VATliability could affect the essential interests of its national security. It cites case-lawof the Court according to which a Member State may not plead provisions,practices or circumstances existing in its internal legal system in order to justify afailure to comply with the obligations and time-limits laid down in a directive.

21.

    It must be observed in that regard, as the Court has already held in Case 222/84Johnston [1986] ECR 1651, paragraph 26, that the only articles in which the Treatyprovides for derogations applicable in situations which may involve public safety areArticles 36, 48, 56, 223 and 224 of the EC Treaty (now, after amendment, Articles30 EC, 39 EC, 46 EC, 296 EC and 297 EC), which deal with exceptional andclearly defined cases. Because of their limited character, those articles do not lendthemselves to a wide interpretation.

22.

    Accordingly, it is for the Member State which seeks to rely on those exceptions tofurnish evidence that the exemptions in question do not go beyond the limits ofsuch cases. In the present case, the Kingdom of Spain has not demonstrated thatthe exemptions provided for by the Spanish Law are necessary for the protectionof the essential interests of its security. It is clear from the preamble to that Law

that its principal objective is to determine and allocate the financial resources forthe reinforcement and modernisation of the Spanish armed forces by laying theeconomic and financial basis for its overall strategic plan. It follows that the VATexemptions are not necessary in order to achieve the objective of protecting theessential interests of the security of the Kingdom of Spain.

23.

    Furthermore, as the Advocate General pointed out at point 12 of his Opinion, theimposition of VAT on imports and acquisitions of armaments would notcompromise that objective since the income from payments of VAT on thetransactions in question would flow into the State's coffers apart from a smallpercentage which would be diverted to the Community as own resources.

24.

    Consequently, it must be held that the Spanish Government has not establishedthat the abolition of the exemption from VAT on imports and acquisitions ofarmaments, munitions and equipment exclusively for military use, provided for bythe Spanish Law, constituted a measure which would undermine the protection ofthe essential interests of the security of the Kingdom of Spain and that thoseexemptions were therefore justified under Article 223(1)(b) of the Treaty.

25.

    To justify the exemptions provided for by the Spanish Law, the Kingdom of Spainrefers, further, to Article 28(3)(b) of the Sixth Directive, which allows MemberStates to continue to exempt, during a transitional period, the activities set out inAnnex F, including, in paragraphs 23 and 25, 'the supply, modification, repair,maintenance, chartering and hiring of aircraft, including equipment incorporatedor used therein, used by State institutions‘, and 'the supply, modification, repair,maintenance, chartering and hiring of warships‘.

26.

    According to the Kingdom of Spain, Article 28(3) of the Sixth Directive does notgovern the transitional arrangements applicable to Member States which joined theCommunity after 31 December 1977. However, it considers that it would beinequitable to treat new Member States acceding to the European Communitiesless favourably than those which were already members on that date, so that thenew Member States can also exercise the rights conferred by Article 28 of the SixthDirective from the time of their accession to the Community even though that rightis not expressly provided for in the Act of Accession.

27.

    The Kingdom of Spain observes that Article 9 of Law No 44/82 of 7 July 1982 onbudgetary appropriations for investments and operating costs of the armed forces(BOE of 21 July 1982) exempted from equalisation tax imports of every type ofequipment necessary for the investment plan of the Spanish armed forces. It pointsout that this tax disappeared when VAT was introduced and was absorbed by VATfollowing the accession of the Kingdom of Spain to the Communities. Therefore,it considers that the exemption at issue was in existence at the time of its accessionand could be maintained on the basis of Article 28 of the Sixth Directive.

28.

    On the other hand, the Commission takes the view that equalisation taxdisappeared with the introduction of VAT by Law No 30/85 which took effect on1 January 1986, the date of the accession of the Kingdom of Spain to the EuropeanCommunities. From that, the Commission therefore concludes that, at the time ofthe introduction of VAT, the Kingdom of Spain provided for the imposition of thetax on all intra-Community imports or acquisitions of military equipment. TheCommission asserts that the exemption of such transactions was decided onsubsequently by the Kingdom of Spain in the Spanish Law (but with retrospectiveeffect from 1 January 1986).

29.

    In that regard, suffice it to note that, according to the case-law of the Court (CaseC-35/90 Commission v Spain [1991] ECR I-5073, paragraph 7), since the Kingdomof Spain subjected supplies of armaments, munitions and equipment exclusively formilitary use from other Member States to the general scheme of VAT by meansof Law No 30/85 which entered into force on 1 January 1986, it could no longersubsequently claim the right to continue to exempt those activities pursuant toArticle 28(3)(b) of the Sixth Directive.

30.

    Furthermore, a retrospective exemption of the kind provided for by the Spanishlegislation would be contrary to the purpose of the relevant Community provisions.It is settled case-law that the very wording of Article 28(3)(b) of the Sixth Directiveprecludes the introduction of new exemptions (Case 73/85 Kerrutt [1986] ECR 2219,paragraph 17, and Case C-74/91 Commission v Germany [1992] ECR I-5437,paragraph 15).

31.

    As regards the scope of Article 28(3a) inserted by Directive 91/680 whichauthorises the Kingdom of Spain to exempt from VAT the activities set out inparagraphs 23 and 25 of Annex F, it must be observed that this exemption, beingan exception, is to be interpreted strictly (see Case C-35/90 Commission v Spain,cited above, paragraph 9) and only partially remedies the failure by the Kingdomof Spain to fulfil its obligations. First, the failure persisted in its entirety until 1January 1993, the date of the entry into force of Directive 91/680, and second, thederogation provided for by that directive only concerned aircraft and warships.

32.

    Accordingly, it must be held that, by exempting intra-Community imports andacquisitions of arms, ammunition and equipment exclusively for military use, otherthan the aircraft and warships mentioned in points 23 and 25 of Annex F to theSixth Directive from VAT, notwithstanding the provisions of Articles 2(2), 14, 28a,and 28c(B) of that directive, the Kingdom of Spain has failed to fulfil its obligationsunder that directive.

Costs

33.

    Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to beordered to pay the costs, if they have been applied for in the successful party'spleadings. Since the Kingdom of Spain has been unsuccessful and the Commissionhas applied for costs to be awarded against it, the Kingdom of Spain must beordered to pay the costs.

On those grounds,

THE COURT (Sixth Chamber),

hereby:

1.    Declares that, by exempting from value added tax intra-Communityimports and acquisitions of arms, ammunition and equipment exclusivelyfor military use, other than the aircraft and warships mentioned in points23 and 25 of Annex F to Sixth Council Directive 77/388/EEC of 17 May1977 on the harmonisation of the laws of the Member States relating toturnover taxes — Common system of value added tax: uniform basis ofassessment, in the version resulting from Council Directive 91/680/EEC of16 December 1991 supplementing the common system of value added taxand amending Directive 77/388/EEC with a view to the abolition of fiscalfrontiers, notwithstanding the provisions of Articles 2(2), 14, 28a, and28c(B) of that directive, the Kingdom of Spain has failed to fulfil itsobligations under that directive;

2.    Orders the Kingdom of Spain to pay the costs.

KapteynHirsch Murray

Delivered in open court in Luxembourg on 16 September 1999.

R. Grass

P.J.G. Kapteyn

Registrar

President of the Sixth Chamber

1: Language of the case: Spanish.