On 15 June 1962 the undertaking Molkerei-Zentrale Westfalen/Lippe GmbH, a dried milk factory incorporated, with limited liability under German law (hereinafter referred to as Molkerei-Zentrale), obtained customs clearance for Roller whole-milk powder which it had imported from Belgium.

Pursuant to German law, the relevant customs office imposed on this import turnover equalization tax (Umsatzausgleichssteuer) at the rate of 4 %.

In its action pending before the supreme court, Molkerei-Zentrale maintains in particular that the turnover equalization tax constitutes an infringement of Article 95 of the EEC Treaty, on the ground that German law exempts from the turnover tax both deliveries of domestic whole-milk powder and those of the basic product (Vorproduct), that is to say, of domestic milk.

Molkerei-Zentrale puts forward the following considerations:

The Bundesfinanzhof fails to recognize the fact that, in order to oblige the Member States to fulfil their obligations, the EEC Treaty does not merely provide political means: in fact recourse is also had to the method of direct effect which primarily serves the interests not of individuals but rather of the Community. The principle of the precedence of Community law cannot give rise to difficulties unless there is a conflict with the constitutional law of a Member State, which does not occur in the present case.

The Bundesfinanzhof underestimates the weight of its own case-law, which is quite capable of having de facto the scope of a principle with regard to a great number of cases of this type. It is untrue, moreover, that this supreme court cannot eliminate inconsistencies which may exist between the decisions of the lower courts with regard to the questions at issue here: these are pure questions of law.

The Court of Justice is called upon not to give a ruling on the German judicial system but to find that there is a duty on the part of the German courts to apply Community law by reason of its precedence.

The Government of the Federal Republic of Germany declares that it agrees with the Bundesfinanzhof's objections, especially when it refers to the situation existing in Germany with regard to the judicial system.

The Commission expresses the opinion that the considerations set forth by the Bundesfinanzhof do not justify abandoning the interpretation given by the Court in Case 57/65.

In support of its argument it makes the following observations:

The procedures provided for by Articles 169 et seq. of the Treaty which are not available to individuals and the protection which the national courts are called upon to grant to the latter against acts contrary to the Treaty committed by Member States supplement one another. This is all the more expedient as practical reasons frequently mean that the Commission is prevented for a long time from commencing and completing a procedure on the basis of Article 169.

It may happen that individuals can have themselves placed in the same position as if national law had already been amended, whereas the sole result which the Commission or the other Member States may bring about is that the State which is found to have failed to fulfil its obligations shall take the necessary measures to comply with the judgment of the Court of Justice (Article 171 of the EEC Treaty). This a natural consequence of the precedence of Community law.

If the judgment in Case 57/65 has released a flood of applications, both to the administrations and to the courts, the cause is to be sought in the wrong interpretation which has been given to it namely that it declared at the same time that Article 97 was directly applicable. The solution which the Commission puts forward in this connexion (cf. below: Question 2) is such as to reduce the number of applications pending in Germany to reasonable proportions.

The observations of Molkerei-Zentrale may be summarized as follows:

The direct applicability of Article 97 is clear from the judgment in Case 57/65.

Article 97 merely constitutes a particular instance of Article 95; thus the national courts have the power and the duty to check whether the rates of taxation which the State concerned states are average rates are in conformity with Article 95.

The fact that the calculation of the charge imposed on domestic products may present difficulties does not mean that direct applicability must be excluded. Moreover, the principal difficulties appear in connexion with the calculation of internal taxation imposed… indirectly on similar domestic products (Article 95); this applies with equal force to instances where Article 95 alone applies.

The outcome is the same when Article 97 is examined in isolation. This provision gives to the Member States a discretion only to the extent to which it leaves them free to decide whether they wish to fix average rates and form groups of products. On the other hand, there is no discretion in determining the charge under the turnover tax, the calculation of the average rates and the decision as to which products may be grouped.

The second paragraph of Article 97 does not weaken this view but, on the contrary, corroborates it. It is intended to strengthen the position of the Commission as against the Member States: in fact the Commission may take immediately binding measures and has no need to begin by issuing an opinion which is not binding under Article 169. The reason is that with regard to the application of Article 97, the risk that Member States may indulge in operations which are contrary to the Treaty is particularly great. This is one more proof that the observance of the objectives of the Treaty, which is ensured by the Commission, must be brought about in a very special manner, in this case by the review which the national court is bound to carry out.

The observations of the Federal Government may be summarized as follows:

Even if the Court of Justice were to confirm its case-law in connexion with Article 95, it would be impossible to deduce therefrom any consequence whatsoever with regard to the immediate applicability of Article 97.

Similarly the special procedure provided for in the second paragraph of Article 97 makes it impossible to consider this as a special case under Article 95, in that all the rules applicable to that article are also applicable to the first. It might at the most be considered as a lex specialis, although that theory does not take into account the fact that the cumulative multi-stage tax system is applied in five Member States.

The Commission in effect agrees with the opinion of the Federal Government.

It makes the following observations:

Article 97 leaves to the Member States a considerable area of discretion, in authorizing them to establish average rates for products or groups of products. The Treaty had to provide this facility since in a cumulative multi-stage tax system it is technically impossible to calculate exactly the amount of the taxation imposed at prior stages and thus to prevent any average rates from diverging either upwards or downwards from the actual taxation imposed on the various products.

Those difficulties are further aggravated by the fact that the various Member States apply different methods of calculation to determine the average charge imposed on a product.

Moreover the Member States have a wide discretion to form groups of products, even though more or less arbitrary grouping of products into large groups is not authorized.

Similarly the special rules of procedure provided for in the second paragraph of Article 97 tend to indicate that only the Commission is required to ensure that the provisions of this article are observed. Consequently Article 97 does not fulfil the conditions required for producing direct effects. The national courts, however, have the power to consider whether they are faced with a case for the application of Article 97, that is to say, whether they are concerned with an equalization tax intended to replace the turnover tax charged according to a cumulative multi-stage tax system or an average rate applicable to a product or to a group of products.

Molkerei-Zentrale declares that the rate of a charge does not become an average rate by virtue of the sole fact that it has been so described by the legislature.

In this connexion it puts forward the following considerations:

The term average implies that a weighted average must be calculated. A real average rate must of necessity involve an actual comparison of charges, based on up-to-date and reliable statistical data. Moreover account must be taken of the same rate for import and for export (Article 96). Finally, the wording of Article 97 alone indicates that it is only to be applied to rates fixed after 1 January 1958 on the basis of new calculations.

From this it concludes that the rate in dispute is not an average rate.

The Federal Government makes the following observations:

The concept of average rates is closely bound up with the difficulties to which a turnover tax on domestic products gives rise within a cumulative multi-stage tax system.

The first difficulty results from the fact that it is extremely difficult to determine with which similar products the imported product is to be compared. The domestic products are often manufactured by very different production processes. The amount of the turnover tax varies in accordance with the number of commercial processes which the product is required to undergo.

Other difficulties arise when the indirect tax is determined. The comparison must relate to the total tax and cannot be calculated precisely even after lengthy calculations. Moreover, the basic factors in the calculations (price, analysis of costs and structure of the undertakings) undergo constant modifications.

Finally, in view of the multitude of products with which it is faced (more than 50000), it is impossible to require of the administration completely accurate calculations, taking into account the time which this would take, the personnel at its disposal and reasons inherent in the problem itself. The work required in this connexion would moreover be out of proportion with the result, as, once again, to whatever lengths the consideration was taken, it could only give approximate figures.

Consequently the only remedy for those difficulties is to have recourse to assessments and flat rates; this is in fact the basic idea of the signatory States in adopting the concept of average rates in Article 97. In those circumstances, far from being equivalent to the average of rates calculated exactly, those rates can only represent an exact median value for an aggregate number of cases.

These are the reasons why in the States concerned all the rates of equalization tax are of necessity average rates, unless there are in the national territory no similar products or products capable of substitution, with which a comparison might be made. It is of little importance whether the rate under consideration has been fixed before or after the entry into force of the Treaty. Far from conferring fresh powers, Article 97 ratifies the possible existence of rules prior to the entry into force of the Treaty.

It is also of little importance that the rate of the charge has not been modified for some years or that it has been calculated on the basis of statistical data relating to an earlier period. If, for all the products liable to the equalization tax, continual examination of the criteria were to be made in order to take into account any slight variations, the effort would be out of proportion to the result, as on the whole modifications to the charges, whether up or down, would end by offsetting one another. In principle it is for the legislature to decide the groups into which products are to be formed in order to establish the average rates. There is an average rate even when an identical rate of charge is applied to products corresponding to different stages of production.

It is not correct that the average rate (Durchschnittssatz) must be determined on the basis of the tax imposed on the product with the lowest charge; average (Durchschnitt) means the median value.

The second part of Question 3 is inadmissible because it concerns the application of the Treaty to a particular case.

The Commission makes the following observations :

Molkerei-Zentrale considers that Question 4 should be answered in the affirmative.

Although it admits that cases referred to in this question will be rare, since it may be conceded that the Commission will always ensure complete observance of the Treaty, it declares that if those hypothetical situations nevertheless came about, it must be considered that in the final analysis only the Court of Justice can give a binding ruling on Community law. The Federal Government and the Commission express the opinion that it is unnecessary to reply to Question 4, since Question 2 must be answered in the negative.

Molkerei-Zentrale observes that by an indirect tax on domestic products there must be understood the direct charge levied on basic products (raw materials, semi-finished products and finished products which are added). On the other hand there should not be taken into consideration the charge on accessory and auxiliary materials, the means of production, transport costs and marketing costs.

The Federal Government makes the following points:

As a general rule, the objective of the equalization tax (and this is established by the Treaty) is to offset the turnover tax imposed on comparable domestic products. This objective can only be attained if the total tax on domestic products is taken into account. But from the outset natural barriers are erected, as the imposition of turnover tax has less effect on the price of the final product the further back one goes in considering prior taxation at earlier stages of the basic products in an endeavour to determine the tax. Thus the Member States have resorted to a flat rate in order to determine the tax deriving from the basic products and auxiliary materials.

This then is how the question must be answered; account must be taken of all taxation exigible as turnover tax in the course of the manufacturing cycle of a product, since, in one way or another, it is connected to the product and consequently constitutes an element of its final price.

The Commission makes the following remarks :

The ratio legis of Articles 95 et seq. indicates that they only refer to taxes pertaining to the products (produktbezogene Steuern), which are governed by the principle of the country of destination in almost all modern tax systems. Moreover, the term indirectly must nevertheless be widely interpreted, because the logical application of this principle requires that charges imposed on domestic products be wholly offset. There is nothing to support the view that the authors of the Treaty intended to restrict this application. By internal taxation imposed indirectly on a product there must thus be understood not only taxes which were imposed, as taxes pertaining to the product, at all stages of its production, the raw materials, the semi-finished products, and possibly the finished products which are met with in the final product, but also the taxes borne, in the form of taxes pertaining to the product, by the auxiliary materials, the means of production and the services (connected with production) (such as the transport of products, for example) which were employed at all earlier stages, in the course of production of the raw materials, the semi-finished products and the finished products.