Court of Justice 15-03-1983 ECLI:EU:C:1983:74

The exclusion of the expenditure in respect of losses of 2% in the processing of skimmed-milk powder into animal feed

The Italian Government points out that by virtue of national practices applied even before the entry into force of the common agricultural policy the Italian intervention agency has paid aid in respect of skimmed-milk powder for quantities including losses amounting to no more than 2% of the total. These losses represent the waste lost, for technical reasons, during the manufacturing process.

The Government claims that the Commission's argument to the effect that aid may be granted only for skimmed-milk powder which is actually used as animal feed, an argument which led it to refuse Community finance for the expenditure in respect of such losses, is not compatible with Regulation (EEC) No 990/72 of the Commission of 15 May 1972 on detailed rules for granting aid for skimmed milk processed into compound feedingstuffs and for skimmed-milk powder for use as feed (Official Journal, English Special Edition 1972 (II), p. 428).

Article 1 of that regulation states that “aid shall be granted for skimmed-milk powder which has ... been used in the manufacture of compound feedingstuffs ...”. In the Italian Government's opinion that can only refer to milk used in the process of the manufacture of the feed including any loss due to that process. Such losses are in fact a necessary and inevitable consequence of the process of manufacture. The quantities lost thereby are therefore part of the product which has “been used in the manufacture” even if not processed themselves. Furthermore, the concept of “actual” use was included in the Community regulations to indicate that the products in question must be destined solely for animal feed.

The Italian Government goes on to observe that the Commission's view is that the farmer does not benefit fully from Community aid inasmuch as he must himself bear the costs of the losses which inevitably occur in the processing of the milk for the manufacture of feed. To that extent the view of the Italian Government corresponds more closely to the objective of the Community rules, that is to say to make the use of skimmed-milk powder competitive in comparison to the use of substitute products.

Finally the processing undertaking has no interest in increasing the wastage since the amount of waste for which aid is granted is assessed case by case and may not exceed the 2% limit. On that point the Italian Government adds that the Commission's decision is erroneously based on a flat-rate reduction, with a maximum of 2%. The Government reserves the right to prove, as far as is possible, the average percentage of actual waste for which aid was paid.

The Commission is of the opinion that the exclusion of the aid paid by the Italian intervention agency to processors in respect of “losses” accords with both the scheme and with the letter of the relevant rules of Community law. In that connection it refers to the first recital in the preamble to Regulation (EEC) No 986/68 of the Council of 15 July 1968 laying down general rules granting aid for skimmed-milk and skimmed-milk powder for use as feed (Official Journal, English Special Edition 1968 (I), p. 260), which states that “provision must be made for the granting of aid for skimmed-milk powder which is denatured or used as feed.” From that point of view it is essential that the powder be actually used as feed. It is not therefore sufficient that the relevant quantities are intended for use as feed by virtue of their use in the process of manufacturing the feed. As is confirmed by the third recital in the preamble to Regulation No 990/72, which states that provision should be made to ensure that “aid is granted only for ... skimmed-milk powder processed into feeding-stuffs”, to be eligible for aid the product must be found in a processed form in the compound feed.

The Commission considers that the requirements of strict supervision in an economic sector which is so vulnerable to fraud means that it is impossible to contemplate a margin which amounts, in effect, to the payment of aid for a part of the product whose actual use cannot be checked. To accept such a margin would mean accepting that a part of the product which was in the trader's business and of which there is no trace on the market is eligible for aid. Such a concept cannot be accepted by the Commission in the context of the proper management of the market and of the Community budget.

As regards the flat-rate reduction, with a maximum of 2%, the Commission states that the Italian Republic has not as yet provided the documents required by Article 5 (1) of Regulation No 729/70 for the purpose of determining the precise sums paid out by the Italian intervention agency in respect of skimmed-milk powder which is not to be found in a processed form in compound feed. Consequently the Commission has to limit the amount which it charged to the Fund to that part of the Italian expenditure which definitely complied with the requirements of the Community rules.

Finally the Commission points out that it did not raise any objection with regard to that question in the financial years prior to 1974 because in the case of Italy it had never checked that type of expenditure in respect of earlier years.

In its reply the Italian Government refers to a circular of the Italian Ministry of Agriculture dated 10 July 1974 which provided for a margin of actual losses up to a maximum of 2%. That maximum percentage was fixed on the basis of technical surveys carried out at the processing plants. The processors were required to state the actual daily loss in their processing records and, at the stage when the aid was calculated, the provincial agricultural inspectorate informed the Italian intervention agency of the amount of the loss in the statement of quantities incorporated into animal feed.

An inquiry relating to the processing records of 11 manufacturers of animal feed who processed approximately 25% of all the milk powder in Italy during the years 1974 and 1975 revealed that the average actual loss for which aid was granted was 1.745% for the financial year 1974 and 1.464% for the financial year 1975.

On the basis of those data the applicant reaffirms its points of view and contends, as an alternative argument, that the reduction made by the Commission must correspond to the averages indicated, in respect of which the aid was granted, that is to say at the fixed rate of 1.5%.

The Commission, in its rejoinder, contends that the facts presented by the applicant in its reply show that the loss or waste during processing for which the Italian Republic granted aids was not checked to ensure that they were genuine but simply for accounting purposes. It was therefore possible to receive aid in respect of quantities of skimmed-milk powder which were not in the hands of the undertaking, provided only that they had been recorded in the books of account as an actual daily loss not exceeding 2% of the quantity contained in the final product.

The Commission considers itself unable to accept such administrative management which would open the door to a variety of abuses which could not be verified.

Finally the Commission points out that the clearance of the accounts was carried out on the basis of accounts presented in the form laid down by Regulations Nos 729/70 and 1723/72. It could not, at the time of such clearance, accept as eligible for financing any part of the expenditure other than that which, on the basis of the accounts presented, corresponded to operations which complied with the rules of Community law. It is not possible to take into account the systematic error revealed by the accounts other than at its maximum extent of 2% unless the figure could be proved precisely and not on the basis of a presumption or of a flat rate.

The exclusion of the expenditure in respect of aid for the private storage of cheese

As regards the Commission's refusal to accept as chargeable to the Fund expenditure in respect of aid for the private storage of Grana Padano and Parmigiano-Reggiano cheese for the financial years 1974 and 1975, the Italian Government considers that the Commission erroneously bases its decision on the fact that the storage contracts were concluded several months after the cheese had gone into storage. According to Article 10 (2) of Regulation (EEC) No 971/68 of the Council of 15 July 1968 (Official Journal, English Special Edition 1968 (I), p. 251) private storage paid for those cheeses is. to be conditional on the conclusion of a contract of storage with the intervention agency, and the requirements which must be fulfilled for the conclusion of such a contract are laid down in Article 16 of Regulation (EEC) No 1107/68 of the Commission of 27 July 1968 (Official Journal, English Special Edition 1968 (II), p. 382).

Aid was granted according to the procedure laid down by the decision of the Italian intervention agency's governing board dated 20 September 1973 (Gazetta Ufficiale della Repubblica Italiana No 225 of 2 October 1973), which contains the requirements to be fulfilled under the relevant rules of Community law. In conformity with that procedure the Italian agency, having verified that the request for the conclusion of a contract submitted by the person concerned fulfilled those requirements, informed that person, the relevant provincial agricultural inspectorate and the Consorzio di Tutela [producers' association for quality protection] that the said request had been granted subject to the inspectorte's supervising the product's entry into storage. Subsequently the Italian intervention agency regarded the contract as concluded once the inspectorate confirmed by report the storage of the quantities of cheese. The transmission to the person concerned of the general terms, in which all the operations carried out were summarized, for his signature, was purely for accounting purposes. Although the aid was paid only after receipt of the signed general terms it was nevertheless in fact due once the inspectorate's report had been drawn up.

The Italian Government is therfore not able to agree with the Commission's view that the contract cannot be said to be concluded unless the general terms have been signed by the person concerned. It states that under Article 1326 of the Italian Civil Code a contract is complete at the moment when the offeror has knowledge of the other party's acceptance. In the present case the contract was concluded at the moment when the intentions of the person concerned expressed in his application concurred with the intentions of the Italian intervention agency expressed in its letter of acceptance and came into effect as a result of the verification undertaken by the inspectorate and recorded in the report.

The Italian Government opposes the analogous application, proposed by the Commission, of the Court's judgment of27 January 1981 in Case 1251/79 Italian Republic v Commission of the European Communities [1981] ECR 205), according to which the contract does not become perfect until the preparation of the written instrument, after verification of all the relevant information by the intervention agency. The system of aid for the private storage of cheese is clearly different from that relating to aid for the storage of wine with which that case was concerned.

Thus Article 9 (1) of Regulation No 1437/70, which relates to wine, expressly provides for the drawing up of a contract in two copies, whereas Regulations Nos 971/68 and 1107/68, which relate to cheese, do not lay down any requirements as to the form of the contract itself. In the present case verification both as to formal and as to substantive matters preceded the “conclusion” of the contract. Moreover the general terms drawn up by the Italian intervention agency for accounting purposes are superfluous so far as the Community rules are concerned. Finally, the conclusion of storage contracts in respect of cheese is not subject to any specific time-limit, such as that provided for the case of the storage of wine.

Alternatively, the Italian Government argues that it is an arbitrary act to refuse to accept as chargeable the expenditure in question for reasons which relate solely to form when the objectives of the Community regulations are in fact attained.

The Commission points out that by making the grant of aid for the private storage of certain cheeses conditional on the conclusion of a contract Article 10 (2) of Regulation No 971/68 imposes an obligation to conclude the contract before the storage is effected. In Italy, however, storage contracts were concluded several months after the storage had been effected, and even, in some cases, on the day before the expiry of the storage period.

As regards the concept of a contract the Commission is of the opinion that in the absence of a Community concept it is necessary to refer to the national law of each Member State in relation to those matters which are not expressly regulated by Community law, such as the form of the contract and the moment at which it may be regarded as concluded and binding upon the parties.

In that context it refers to the aforementioned decision of the Italian intervention agency's governing board of 20 September 1973. According to Article 2 of that decision the contract between the Italian intervention agency and the storer is concluded “at the moment when the latter appends his signature to the instrument of acceptance whereby he agrees to comply with the conditions set out in the general terms”. Article 5 of that decision requires the signature of that instrument to be authenticated within a period of five days failing which it will be void.

Contrary to the applicant's contentions it follows from those provisions of national law laid down by the Italian intervention agency's governing board that the latter regarded the signature of the instrument of acceptance of the general terms by the trader to be the decisive factor for the purposes of the conclusion of a contract rather than the drawing up of a storage report by the provincial inspectorate. Furthermore, until the moment of signature the trader has not entered into any obligation with regard to the Italian intervention agency even if there has been compliance with all the necessary storage requirements. Consequently, until the signature of the instrument of acceptance the Italian intervention agency did not have at its disposal any legal instrument which would enable it to enforce the trader's obligations.

The Commission therefore takes the view that the storage operations were not effected according to the Community rules but according to a system which prevents a definitive verification by the Italian intervention agency, sometimes up to the last day of the storage period, and which makes it impossible to enforce the obligations which it is the intention of Community law to impose on the trader by the system of contracts.

In its reply the Italian Government maintains its view based on Article 1326 of the Italian Civil Code. The grant by the Italian intervention agency, in its letter of acceptance, of the application of the person concerned renders both the trader and the agency subject to mutual obligations. The signature of the general terms is only a formality for the purposes of a summary record. In that respect the information provided by the decision of the Italian intervention agency's governing board is incorrect both linguistically and legally.

The Italian Government points out finally that the procedure followed for the payment of aid demonstrates that in substance, regardless of any procedural omissions, the aid was paid for actual and genuine storage in respect of which all the required verifications had been carried out beforehand.

The Commission in its rejoinder refers to the Court's judgment of 29 April 1982 in Jointed Cases 66 and 99/81 Pommerehnke and Others [1982] ECR 1363 in order to reaffirm its view that those aspects of a storage contract which are not regulated by Community law are governed by national law, that is to say in the present case by the decision of the governing board of the Italian intervention agency dated 20 September 1973. It is of the opinion that it is not possible to assume that a trader has the intention to incur an obligation when he makes his application since the aforesaid decision explicitly defers the making of the contract to the later stage of the signature of the general terms. The reason why the contract does not come into existence until such signature resides, even more than in any formal defect, in the absence of agreement between the parties.

With regard to the question of form the Commission adds that, according to Article 1326 of the Italian Civil Code, if the offeror requires that the acceptance must be in some particular form then an acceptance is invalid if it is in any other form. If, however, as the Italian Government submitted in Case 1251/79, cited above, in respect of storage contracts relating to wine, the contract is to be regarded as concluded pursuant to an offer made to the public by the Italian intervention agency, that agency, as offeror, requires an acceptance in the form of a signature appended to the general terms.

In that respect the Commission points out that in the present case the Italian Government is reversing the terms of its analysis by treating the trader's application as a contractual offer. Nevertheless, even from that point of view, the trader's application is made by reference to the entirety of the storage system established by Community and national provisions, including conditions as to form.

Finally, the Commission maintains that the verification to ensure that all the requirements for the grant of the aid are met did not take place until after the delivery of the letter of acceptance which was regarded by the Italian intervention agency as the beginning of the agreed period of storage. In its judgment of 27 January 1981 in Case 1251/79 (cited above) the Court has already stated that an interpretation of the term “conclusion” of the contract which would enable a right to the Community aid to be established even before it was determined that the conditions governing that aid were fulfilled, cannot be accepted.

The exclusion of the expenditure in respect of aid for the private storage of dried or smoked pigmeat

The Italian Government disagrees with the interpretation given by the Commission to Regulation (EEC) No 2600/74 of the Commission of 11 October 1974, amending Regulation (EEC) No 289/71 as regards detailed rules for granting private storage aid for certain dried or dried and smoked pigmeat products (Official Journal 1974, L 277, p. 34).

It points out that Article 1 of that regulations provides that:

“Private storage aid may be granted only for products derived from animals recently slaughtered being products held:

...

• in the form of dried or dried and smoked hams the preparation of which requires a maturing period of at least 5 months before consumption ...”

and that Article 2 thereof provides that:

“In the case of dried and smoked hams:

• storage shall commence on the first day of the sixth month following the commencement of drying or drying and smoking;

• the quantity of the products must be shown in the contract both as a number of items and by weight. The weight of the finished product may not be less than 70 % of the weight of the fresh product as ascertained before drying or drying and smoking.”

The Italian intervention agency considered the commencement of drying to be the date on which the first part of the consignment of fresh products which is the subject of each storage contract was weighed and regarded the contractual period of storage as commencing five months and one day after that date.

The Commission refused to accept the expenditure relating to the contracts in question as eligible for Community finance because it considered that the minimum requirements as to the length of the drying period prior ot the contractual storage must be complied with in respect of. the whole quantity under contract and that therefore the period of contractual storage could not begin to run until five months had elapsed since the date on which the last part of the consignment under contract was put into storage for drying. In that connection the Commission referred to Regulation (EEC) No 1637/74 of the Commission of 27 June 1974 on special conditions for granting private storage aid for frozen pigmeat (Official Journal 1974, L 173, p. 62) which also provides that the storage period is to begin on the day on which the storing is completed.

In that connection the Italian Government contends that the regulations concerning private storage aids for pigmeat have always made a clear distinction, as regards the commencement of the period of contractual storage, betwen frozen products and products preserved by drying or by drying and smoking since the storage of the two types of products involves quite different operations. If the legislature had intended to place dried pigmeat on the same footing as fresh pigmeat it would therefore have employed, in Regulation No 2600/74, a form of wording similar to that contained in Regulation No 1637/74, that is to say some such formulation as “after the drying is completed” instead of the words “commencement of drying”.

The Italian Government goes on to express the view that the minimum maturing period of five months laid down in Article 1 of Regulation No 2600/74 is not to be regarded as a condition which causes the storage periods to begin to run but as a factor for the purpose of classifying the products which are the subject of storage. From that point of view the Italian intervention agency did not consider it necessary that the whole of the quantity of the stored product should be “finished” but that it was sufficient if the product which was intended to be dried was actually in storage. The aid was paid in respect of products which were actually dried. Moreover, the aid is in proportion to the weight of the fresh product whereas the weight of the “finished” product, which may not be less than 70 % of the weight of the fresh product, is not taken into account except to verify that drying has taken place and it is therefore not necessary for it to be indicated in the storage contract.

In any event the rule gave rise to doubts as to its interpretation. In that connection the Italian Government refers in the first place to the text of a “draft regulation of the Commission amending Regulation (EEC) No 1092/80 laying down detailed rules for granting private storage aid for pigmeat” (Document VI/571/81, Third Revision) of 7 May 1981 according to which “storage shall commence on the 151st day following the date on which the weight is ascertained prior to drying or drying and smoking of the first quantity of the products which are the subject of the contract”. In a later document (dated 4 November 1981) it was proposed to express the rule in a contrary sense: “Storage shall commence on the 151st day following the commencement of drying ... of the final consignment of the total quantity of the product which is the subject of the contract.”

Later the Commission stated, in a working document dated 1 April 1982, with regard to private storage under Regulation No 717/82, that: “The storage period shall start at the beginning of the first hour of the day following the day on which entry into store is completed.” The Commission's representative on the Management Committee who examined that document stated that that provision was binding on intervention agencies as from the time of the storage referred to in Regulation No 717/82 and that in that respect the Commission would not raise any objection with regard to storage undertaken previously, thus taking into account an apparent inconsistency in the rules in force.

Finally the Italian Government states that the Commission shares the responsibility for a possibly erroneous interpretation of the Community provisions in question. In that connection it refers to an exchange of correspondence during the month of October 1975 between the Italian intervention agency and the relevant departments of the Commission with regard to the meaning of the expression “first day of the sixth month” contained in Article 2 of Regulation No 2600/74 and to bilateral meetings held in September and November 1975 to consider the operation of the storage procedures in question. Any error of interpretation may also be imputed to the solution adopted by the Italian administration. Consequently the expenditure incurred by the Italian intervention agency in that area should be charged to the Fund in accordance with a consistent line of decisions of the Court on the matter.

The Commission recalls that in order to avoid overloading cold storage facilities it took the view, in Regulation No 2600/74, that “provision should therefore be made for the storage of dried or dried and smoked hams.”.

In Article 1 of that regulation dried or dried and smoked ham was defined in such a way that only a product which had been matured for at least five months could be eligible for aid. Thus the obligation of the storer laid down in Article 3 (2) of Regulation (EEC) No 289/71 of the Commission of 10 February 1971 (Official Journal, English Special Edition 1971 (I), p. 60) to take the agreed quantity of the product in question into store within the time limits laid down and to store it for the stipulated period can relate only to products which fulfil the minimum requirement as to maturing.

Article 2 of Regulation No 2600/74 then defines the commencement of the agreed period of storage by reference to the minimum maturing period. Far from amending the definition of the product referred to in that regulation, that provision relates to the commencement of drying or drying and smoking with regard to each ham to be stored under contract. In the case of a storage contract relating to a number of hams the requirement as to maturing is therefore not satisfied and the storage of the whole quantity cannot in fact commence until the first day of the sixth month after the last ham of that total quantity has been submitted to the drying process.

It is clear in the Commission's view that the system was designed in order to withdraw from the market “finished” products, that is to say products which have completed the minimum period of maturing, for the whole storage period. The purpose of the Community aids is to compensate for a voluntary and unremunerated withdrawal of finished products from the market. To accept the applicant's interpretation would, on the contrary, amount to compensating for withdrawal from the market for the purposes of the acutal process of maturing. Such withdrawal is, however, already the subject of compensation by virtue of the increase in the value of the ham as a result of its maturing.

According to the Italian view the trader in effect receives aid for the whole of the agreed storage period whereas only a part of the total quantity stored fulfils the requirement as to maturing during the whole of that period.

The Commission adds that it also follows from the provisions of Article 2 of Regulation No 2600/74, with regard to the weight of the finished product in relation to the weight of the fresh product, that the weight of the finished product must be known and that the product in question must therefore be “finished”, within the meaning of the regulation, before the actual commencement of storage.

Consequently the Commission considers that in granting aid for the storage of hams which were not “finished” the Italian intervention agency did not comply with the requirements laid down by the relevant Community regulation and that the expenditure connected therewith cannot be charged to the Community budget.

The Commission goes on to explain that the draft regulation cited by the applicant was not intended to interpret the existing set of rules but to modify them. That draft was withdrawn by the officers responsible for it before being submitted to the Commission. Furthermore the working document of 1 April 1982 to which the applicant has referred concerns a problem which has nothing to do with the subject-matter of this case, that is to say the non-application of the analogous provisions of Regulation (EEC, Euratom) No 1182/81 of the Council of 3 June 1971 determining the rules applicable to periods, dates and time limits (Official Journal, English Special Edition 1971 (II), p. 354) in the area covered by each market organization.

Finally the Commission states that the application of the requirement of maturing was not the subject of the exchange of correspondence in October 1975 or the discussions conducted during the bilateral meetings between the Italian intervention agency and officers of the Commission during September and November 1975. It emphasizes that at no time was it aware of the interpretation contemplated by the Italian intervention agency.

The exclusion of the expenditure in respect of aids for the storage of wine

As regards the Commission's refusal to provide Community finance in respect of aids granted in connection with contracts for the private storage of wine made with retroactive effect after the expiry of the periods prescribed in the Community regulations, the Italian Government requests the Court to reconsider the problem which was the subject of its judgment of 27 January 1981 in Case 1251/79 Italian Republic v Commission of the European Communities [1981] ECR 205.

In states that with regard to the short-term and long-term contracts at issue in this case, which relates to the marketing years 1973 to 1974 and 1974 to 1975, the situation is different from that in the case of the marketing year 1971 to 1972 with which the aforementioned judgment was concerned. The Italian intervention agency no longer paid aids solely from the date of the signature of the instrument of acceptance of the general terms, but, more logically to its way of thinking, from the date of the lodging of the application, which in its view constitutes the date of the conclusion of the contract.

Furthermore, in its judgment the Court based its reasoning on the need for the intervention agency to verify before the conclusion of the contract that the conditions for the grant of the aid are satisfied. The Italian Government considers that the contract may be concluded independently of such verification. In that respect it refers to Article 7 of Regulation No 1437/70 of the Commission of 20 July 1970 (Official Journal, English Special Edition 1970 (II), p. 469) according to which the producer is to be under an obligation to allow, at any time during the period for which the contract is concluded, the identity and volume of wine which is the subject of the contract to be verified.

In its reply the Italian Government again points out that the sale of products placed in storage during the period of validity of the contract, referred to by the Commission in the summary report, has never been established. As a consequence of the results of the first on-the-spot inspection the Italian intervention agency had to correct only certain arithmetical errors on the part of the producers.

In the view of the Commission the problem was resolved by the aforementioned judgment in Case 1251/79 even, mutatis mutandis, in relation to short-term storage contracts concluded in respect of a period to the date on which they were made. Furthermore, it refers to the arguments it submitted in relation to aid for the private storage of cheeses.

The exclusion of the expenditure in respect of aid for the re-storage of wine

On this matter the parties refer to the solution proposed by them in relation to contracts for the storage of wine, given that according to the terms of Regulation (EEC) No 2117/75 of the Commission of 12 August 1975 (Official Journal 1975, L 215, p. 18) aid for the re-storage of wine may be granted only in relation to table wines in respect of which storage contracts were concluded pursuant to Regulation No 1437/70 during the winegrowing year 1974 to 1975.