The European Court of Justice (Third Chamber) (ruling accordingly) held that the first sentence of art. 17(7) of Council Directive 77/388 (‘the sixth directive’) required the member states, in order to comply with the procedural obligation of consultation laid down by art. 29, to inform the Advisory Committee on VAT that they intended to adopt a national measure derogating from the general system of deducting VAT providing sufficient information to enable it to examine the measure in full knowledge of the facts. Moreover, the first sentence of art. 17(7) did not authorise a member state to exclude goods from the system of deducting VAT without first consulting the Advisory Committee. Nor was a member state authorised to adopt measures excluding goods from the deduction system which contained no indication as to their limitation in time and/or which formed part of a body of structural adjustment measures whose aim was to reduce the budget deficit and allow state debt to be repaid.

Facts

The taxpayer was a limited company governed by Italian law which carried out road works. It owned company cars which were not intrinsic to its activity as such, with the result that the purchase, use, maintenance and supply of fuel for such vehicles had not given rise to a right to deduct VAT, pursuant to Italian law.

Taking the view that that legislation was incompatible with the provisions of the sixth directive concerning the deductibility of VAT, the taxpayer claimed repayment from the Revenue by way of reimbursement of VAT paid for the purchase, use, maintenance and supply of fuel for its company cars. When that claim was rejected, the taxpayer brought a court action seeking the annulment of those decisions and reimbursement of the VAT in question. The court referred to the ECJ questions on the interpretation of art. 17(7) and 29 of the sixth directive.

Issues

Whether the first sentence of art. 17(7) precluded from being treated as ‘consultation of the VAT Committee’, for the purposes of art. 29, the notification by a member state of the adoption of a rule of national law which limited the right to deduct VAT in respect of the use and maintenance of the goods referred to in art. 17(2); and whether the national tax authorities might rely as against a taxable person on a provision derogating from the principle of the right to deduct VAT which was not established in accordance with art. 17(7).

Decision

The European Court of Justice (Third Chamber) ruled that art. 17(7) of the sixth directive laid down one of the procedures for authorising derogations, giving member states the right to exclude goods from the system of deductions subject to the consultation provided for in art. 29. Article 17(7) thus laid down a procedural obligation which the member states had to observe in order to be able to make use of the derogation it set out. Consultation of the VAT Committee was a condition precedent to the adoption of any measure on the basis of that provision. Since the VAT Committee had to be in a position to deliberate properly on the measure submitted to it, the procedural obligation referred to in art. 17(7) presupposed that the member states would inform the committee that they envisaged adopting a derogating measure and that they would provide it with sufficient information to enable it to examine the measure with full knowledge of the facts.

On the other hand, art. 17(7) did not lay down any obligation as to the result of the consultation of the VAT Committee, and in particular did not require that committee to take a favourable or unfavourable decision on the national derogating measure. There was therefore nothing to prevent the VAT Committee from simply taking note of the national derogating measure communicated to it.

Article 17(7) authorised a member state to adopt measures of a temporary nature which were intended to deal with the consequences of the situation of its economy at a given time. Therefore the application of such measures had to be limited in time and could not, by definition, be of a structural nature. It followed that the first sentence of art. 17(7) did not authorise a member state to adopt measures excluding goods from the system of deducting VAT which contained no indication as to their limitation in time and/or which formed part of a body of structural adjustment measures whose aim was to reduce the budget deficit and allow state debt to be repaid.

A taxable person had to be able to recalculate its VAT debt in accordance with art. 17(2) of the sixth directive, in so far as the goods and services had been used for the purposes of taxable transactions. Therefore, in so far as an exception from the system of deductions had not been established in accordance with art. 17(7), the national tax authorities might not rely as against a taxable person on a provision derogating from the principle of the right to deduct VAT set out in art. 17(1).

Limiting temporal effect of ECJ judgment

It was only exceptionally that the court might, in application of the general principle of legal certainty inherent in the Community legal order, be moved to restrict for any person concerned the opportunity of relying upon a provision which it had interpreted with a view to calling in question legal relationships established in good faith. In determining whether or not to limit the temporal effect of a judgment it was necessary to bear in mind that although the practical consequences of any judicial decision must be weighed carefully, the court could not go so far as to diminish the objectivity of the law and compromise its future application on the ground of the possible repercussions which might result, as regards the past, from a judicial decision.

The Italian authorities could not invoke the existence of legal relationships established in good faith in order to ask the court to limit the temporal effects of its judgment. Moreover, they had not been able to demonstrate the soundness of the calculation which led them to argue before the court that the present judgment might, if its temporal effects were not limited, entail significant financial consequences. There was therefore no need to limit the temporal effects of the present judgment.

European Court of Justice (Third Chamber). Judgment delivered
14 September 2006.