Judgment summary
The General Court answered a request for a preliminary ruling from the Naczelny Sąd Administracyjny (Supreme Administrative Court, Poland). The request concerned the interpretation of Article 27(1)(b) of Directive 92/83/EEC on the harmonisation of the structures of excise duties on alcohol and alcoholic beverages [1].
The case arose from proceedings between P. sp. z o.o., a company incorporated under Polish law, and the Dyrektor Izby Administracji Skarbowej w Łodzi, concerning the determination of harmonised excise duty liability on two types of alcohol diluents produced by P. between January and April 2014 [2].
On the first question, the Court held that Article 27(1)(b) precludes making the exemption dependent on the intended use being established by classification of the products under a CN heading other than heading 2207, unless concrete, objective and verifiable evidence shows that condition is necessary to ensure the correct application of the exemption and to prevent evasion, avoidance or abuse [34].
On the second question, the Court held that the exemption cannot be denied to a taxable person manufacturing products not for human consumption containing ethyl alcohol subject to excise duty, such as diluents, on the sole ground that that person knew or should have known that those products were being used for human consumption [43].
Background
Following a tax inspection of P. for the period from January to April 2014, the Naczelnik Drugiego Urzędu Skarbowego L. (Head of the Second Tax Office, L.), the first-instance tax authority, declared that products manufactured by P. and described as 'RRK 5' and 'RRK 12' diluents, resulting from the addition of 1% by weight of propylene glycol to partially denatured alcohol, constituted denatured alcohol and should have been classified under heading 2207 20 00 of the CN. The authority found that P. had erred in classifying those products under heading 3814 00 90 of the CN and in considering they were not for human consumption [9].
The first-instance tax authority found that only three of P.'s counterparties used the purchased RRK 12 product for their own purposes and indicated the manner of its use, while the other six counterparties resold the good in a way that made it impossible to identify the recipients on the basis of cash register receipts. By decision of 26 August 2019, that authority determined the excise duty liability of P. for the months from January to April 2014 [10].
Following P.'s appeal, the Director of the Tax Administration Chamber, Łódź, by decision of 22 November 2019, upheld the first-instance decision. P. brought an action against that decision [11].
By judgment of 25 February 2021, the Wojewódzki Sąd Administracyjny w Łodzi (Regional Administrative Court, Łódź) dismissed the action [12]. On 12 May 2021, P. brought an appeal on a point of law before the Naczelny Sąd Administracyjny (Supreme Administrative Court), the referring court [13].
Core dispute
The referring court considered that the existing case-law did not provide a clear answer to whether Article 27(1)(b) of Directive 92/83 could be interpreted so that the manufacture of products not for human consumption must be confirmed by classification under a tariff code other than heading 2207 of the CN, so that failure to classify the product under such a code would be sufficient to refuse the exemption [14].
The referring court also asked whether refusal to exempt from harmonised excise duty products not intended by the manufacturer for human consumption may depend on the circumstances surrounding the sale of those products, in particular the manufacturer's diligence in the course of its activities [15].
The two questions referred asked, first, whether it is sufficient to refuse the exemption that the excise good in the form of ethyl alcohol denatured with propylene glycol is classified under CN code 2207 20, and second, if not, whether the tax authorities must demonstrate that the taxpayer knew the products were used for human consumption, or whether it is sufficient to demonstrate circumstances permitting the conclusion that the taxpayer should have been aware of that fact [16].
Court findings
The Court noted that interpretation must consider the wording, the context and the objectives of the rules [18]. It held that the exemption under Article 27(1)(b) depends on two cumulative conditions, first that the alcohol be denatured in accordance with the requirements of any Member State, and second that it be used for the manufacture of any product not for human consumption [19].
The Court found that classification of the product under a specific CN code is not referred to in the wording of Article 27(1)(b), so it cannot be inferred that the EU legislature intended to define classification under a specific CN code as a criterion for applying the exemption [20]. It recalled that the exemption of products covered by Article 27(1)(a) and (b) is the rule and refusal is the exception [22].
The Court held that its case-law precludes the application of criteria or conditions not apparent from the wording of Article 27(1)(b), and that it must be ascertained on the basis of specific evidence whether the conditions relating to use for the manufacture of products not for human consumption are objectively fulfilled, without limiting the assessment to the finding of classification under a specific CN code [26]. This interpretation was supported by the wording of the first indent of Article 20 and by the scheme of Article 27(1), noting that Article 27(1)(c) explicitly refers to CN code 2209 for vinegar, so the legislature would have referred explicitly to a tariff code in Article 27(1)(b) if it intended to [27, 28].
Regarding the objectives, the Court noted the exemptions seek to neutralise the impact of excise duties on alcohol used as an intermediate product in other commercial or industrial products [29]. It stated that Member States must put forward concrete, objective and verifiable evidence of a serious risk of evasion, avoidance or abuse and ensure conditions do not go beyond what is necessary [32]. The Court observed that the condition at issue, confirmation of the intended use under a code other than heading 2207, seemed neither necessary to ensure the correct application of the exemption nor to prevent evasion, avoidance or abuse, which it was for the referring court to ascertain [33].
On the second question, the Court held that ethyl alcohol denatured in accordance with the requirements of a Member State, contained in products presented as diluents and thus not for human consumption, cannot be denied the exemption on the ground that those products are, at least in part, used for human consumption [39]. It noted that the products were sold under the names 'RRK 5' and 'RRK 12' as diluents, and that there appeared to be no indication that purchasers were not aware they were purchasing products marketed as diluents [40]. Except in cases of evasion, avoidance or abuse justifying the application of Article 27(5), as long as the manufacturer's marketing measures do not prevent the products appearing as products not intended for human consumption, those measures cannot deprive the manufacturer of the exemption [42].
Outcome
The Court ruled that Article 27(1)(b) of Directive 92/83 must be interpreted as precluding the exemption from excise duties for ethyl alcohol denatured in accordance with the requirements of a Member State used in the manufacture of products not intended for human consumption from being dependent on the condition that the intended use has been established by classification under a CN heading other than heading 2207, unless concrete, objective and verifiable evidence shows that condition is necessary to ensure the correct application of the exemption and to prevent evasion, avoidance or abuse [34, operative part 1].
The Court further ruled that Article 27(1)(b) must be interpreted as meaning that the benefit of the exemption cannot be denied to a taxable person manufacturing products not for human consumption containing ethyl alcohol subject to excise duty, such as diluents, on the sole ground that that person knew or should have known that those products were being used for human consumption [43, operative part 2].
The Court noted that the decision on costs is a matter for the national court [44].
Major issues / areas of contention
- Whether classification of a product under CN code 2207 20 is sufficient to refuse the exemption in Article 27(1)(b) of Directive 92/83.
- Whether the excise duty exemption for denatured ethyl alcohol used in products not for human consumption may be made conditional on classification under a CN heading other than heading 2207.
- Whether Member States may impose conditions on the exemption that go beyond what is necessary to ensure correct application and to prevent evasion, avoidance or abuse.
- Whether the exemption may be refused where the taxpayer knew or should have known that products presented as diluents were being used for human consumption.
- The relevance of the manufacturer's diligence in marketing the products to the availability of the exemption.