OPINION OF ADVOCATE GENERAL

SIR GORDON SLYNN

DELIVERED ON 9 FEBRUARY 1983

My Lords,

The Tribunal de Police at Strasbourg, France, has referred to the Court under Article 177 of the EEC Treaty the following question :

“On a proper interpretation of the EEC Treaty, in particular Article 30 thereof, must the requirement laid down in Articles 1 and 2 of Commission Regulation No 749/78 of 10 April 1978 (Official Journal L 101, 14. 4. 1978, p. 7), for conferring on certain textile products the legal status, in relation to customs provisions, of products originating in a Member State of the EEC, be regarded as a measure equivalent to a quantitative restriction?”

Regulation No 749/78 was adopted pursuant to Article 14 of Council Regulation (EEC) No 802/68 of 27 June 1968 (Official Journal L 148, p. 1, English Special Edition 1968, p. 165) for the purpose of applying Article 5 of that Regulation to textile products falling within Chapters 51 and 53 to 62 of the Common Customs Tariff (“CCT”). It was adopted by the Commission because the Committee on Origin to which a draft was submitted was not able by a majority to approve it, and because the Council did not act upon the Commission's proposal within the time prescribed.

Article 5 of Regulation No 802/68 provides as follows:

“A product in the production of which two or more countries were concerned shall be regarded as originating in the country in which the last substantial process or operation that is economically justified was performed, having been carried out in an undertaking equipped for the purpose, and resulting in the manufacture of a new product or representing an important stage of manufacture.”

The preamble to Regulation No 749/78 provides that, with regard to textile products falling within the chapters of the CCT in question, the criteria laid down by Article 5 of Regulation No 802/68 “... may be considered to be fulfilled where the products obtained have undergone one complete process constituting a stage of manufacture; ... this is normally the case where the working or processing results in the product obtained receiving a classification under a tariff heading other than those covering the various products utilized; ... in the case of certain products, however, the general criterion of a change of tariff heading does not correspond to the performance of one complete process; ... it is therefore necessary in the case of these products to lay down conditions additional to the change of tariff heading; ... certain operations, however, constitute a complete process but nevertheless do not result in a change of tariff heading; ... it is therefore necessary in the case of these operations to provide for certain exceptions to the rule requiring a change of tariff heading ...”.

Article 1 provides:

“Textile products falling within Chapters 51 and 53 to 62 of the Common Customs Tariff shall be considered as originating in the country in which they have undergone one complete process as specified in Article 2 or in the Community if they have undergone such process there.”

Article 2 provides, so far as is relevant:

“The following shall be considered as complete working or processing:

(a)	working or processing as a result of which the products obtained receive a classification under a tariff heading other than those covering the various products utilized, except, however, working or processing specified in List A, where the special provisions of that list shall apply;

(b)	working or processing specified in List B.”

On behalf of the Commission it was said that Regulation No 749/78 was inspired by Commission Regulation No 2966/77 of 23 December 1977 (Official Journal L 350, 30. 12. 1977, p. 1) which sets out the definition of the concept of originating products for the purposes of applying tariff preferences granted by the Community in respect of certain products from developing countries. Article 3 is very similar to Article 2 of Regulation No 749/78 but the former refers to “sufficient working or processing” whereas the latter speaks of “complete working or processing”.

This case arises in connection with the importation into France of several consignments of cotton yarn. The yarn was first imported into Germany from a third country by a company registered in the Federal Republic called Wuppertaler Garnbleicherei und Färberei Eduard Goebel (hereafter “WGF”), which carries on business as a finisher of raw textile products. It obtained the cotton yarn principally from Egypt and the USA and then subjected it to the following processes before resale :

1.

Gassing. In this process fluff and small fibres are burnt off the thread with the aid of electric burners. The yarn is passed over the burners at a speed sufficient to ensure that the protruding material is burnt away without scorching or burning the yarn. The effect of the process is that the yarn is lighter in weight, smoother and softer to the touch. Its commercial value and usefulness is increased.

2.	Mercerizing. In this process the yarn is impregnated under tension with caustic soda. This increases its strength by between 30 and 40% and gives it a silky sheen after drying.

3.	Dyeing. A computer is used to ensure that the coloration of the yarn is consistent and the dyes used are resistant to washing up to at least 80o C; the yarn processed by WGF also has high resistance to sweat and chafing.

4.

Spooling.

WGF has submitted that these processes increase the commercial value of the yarn by 159%. Even if certain processes, such as gassing and mercerizing, have been completed in the country of manufacture (in which case they are not repeated after importation into Germany), the increase in value attributable to dyeing alone is 99%. According to WGF, the raw yarn has no “specific” use although it can be woven and the finished article then dyed. The yarn sold by it is intended for knitwear and cannot in practice be used by its customers unless it has been finished.

Between 1978 and 1980 WGF sold several consignments of finished cotton yarn to two companies registered in France: Établissements Tricotage mécanique de Marmoutier and SA Allenbach (“the importers”). The goods were imported into France through three firms of customs agents, also registered in France: SA Transports Seegmuller, Société Heppner and Société Woehl et Cie (“the forwarding agents”). Some of the consignments were presented to the French Customs authority before Regulation No 749/78 came into force. Pursuant to written instructions received from WGF, the forwarding agents filled in the customs declarations, showing Germany as the country of origin, and the goods were cleared under tariff heading 55.05 B II. Subsequently the French customs authorities carried out an investigation in the course of which it was revealed that the yarn had originally come from outside the Community. Proceedings were therefore commenced against the Chairman and Managing Directors of all the companies involved, the companies themselves and WGF's agent in France, a Mr Deltour, for the offence of making a false declaration of origin contrary to various provisions of the Code des Douanes.

It seems that, under French law, an import declaration must be made out, apparently for statistical purposes, prior to the importation of, inter alia, cotton yarn originating in a third country. This has led to the suggestion that the forwarding agents were instructed to declare the origin of the yarn to be Germany in order to avoid the delays of up to a month in the processing of goods requiring an import declaration. The precise nature of the customs procedures applied by the French authorities is not entirely clear and their compatibility with Community law, while questioned by some of the parties, is not a matter which falls within the scope of the present proceedings.

On the basis of Case 41/76 Donckerwolcke v Procureur de la République (1976) ECR 1921, the Tribunal de Police took the view that it wis compatible with Community law to require the country of origin of goods to be entered on the customs declaration. From this it inferred that the French customs authorities could also require the country of “first origin” to be entered on the declaration. The problem exercising the Tribunal de Police seems to have been the importers' and forwarding agents' knowledge of the country of “first origin” and it took the view that this problem could only be resolved once the proper interpretation of Regulation No 749/78, in particular Article 2, had been determined; on the other hand, the Tribunal referred to the fact that in the Donckerwolcke case the Court of Justice held that an obligation (imposed by a Member State) to set out in the customs declaration the country of origin of goods, in free circulation in the Community and covered by a Community movement certificate, might be prohibited by Article 340 “if the importer were required to declare, with regard to origin, something other than what he knows or may reasonably be expected to know”.

The order for reference goes on to say: “that Regulation (i.e. Regulation 749/78) raises the problem of the determination of the extent of the working or processing by reference to the tariff heading (of the goods), and no longer only in relation to the physical processes to which the goods were subjected and which could constitute a substantial operation, as defined by Regulation No 802/68 and Commission Regulation No 1039/71 of 24 May 1971 (Official Journal L 113, 25. 5. 1971, p. 13, English Special Edition, 1971, p. 274). It is therefore logical to raise the question whether the exceptions laid down in Article 2 of Regulation No 749/78 constitute a quantitative restriction or a measure having equivalent effect prohibited by Article 30 of the Treaty ...”

It is agreed that the goods in this case, cotton yarn, are not classified under a different tariff heading after they have undergone the processing which is in question. List B sets out the “working or processing operations which do not result in a change of tariff heading but which do confer the status of originating products on the products undergoing such operations”. Cotton yarn is not included in this list.

Although the question referred is ex facie limited to whether the requirement of Articles 1 and 2 of Regulation No 749/78 is to be regarded as violating Article 30 of the Treaty, it seems that, in the light of the Tribunal's approach and the arguments advanced, that question necessarily involves in this case deciding:

(a)	whether as a matter of interpretation of Regulation No 749/78, processes of the kind described in this case result in Germany being considered as the country of origin of the yarn imported into France;

(b)	whether, if not, Regulation No 749/78 has validly applied and is compatible with Article 5 of Regulation No 802/68;

(c)	whether Regulation No 749/78 does accordingly constitute a measure prohibited by Article 30 of the Treaty.

It was suggested that, on its true construction, Regulation No 749/78 does not apply to cotton yarn at all. It was intended to amend and replace two earlier Commission Regulations which were also measures for the application of Article 5 of Regulation No 802/68. The first of these is Regulation No 1039/71, which is mentioned in the order for reference and which defined the processes or operations which, in the Commission's view, satisfied the criteria set out in Article 5 of Regulation No 802/68, so far as the origin of certain woven textile products were concerned. The second Regulation, Regulation No 1480/77 of 24 June 1977 (Official Journal L 164, 2. 7. 1977, p. 16) did the same for a broad range of goods including knitted and crocheted articles and certain articles of apparel and footwear. Article 4 of Regulation No 749/78 provides that the rules laid down in both Regulations for products falling within chapters 51 and 53 to 62 of the CCT are replaced by the rules set out in Regulation No 749/78. However, neither Regulation No 1039/71 nor Regulation No 1480/77 covered cotton yarn. It can, therefore, be argued that the omission of cotton yarn from List B of Regulation No 749/78 is to be explained by the fact that the Regulation was intended to replace two other Regulations which did not apply to cotton yarn. If so, it could be said that Regulation No 749/78 leaves open the position of cotton yarn, which must be dealt with under the provisions of Article 5 of Regulation No 802/68.

I do not think that this can be sustained. On behalf of the Commission it was submitted that Regulation No 749/78 was intended to apply exhaustively to all the textile products falling within Chapters 51 and 53 to 62 of the CCT, including cotton yarn, which is classified under subheadings 55.05 and 55.06. This submission is supported by the preamble of the Regulation, which refers to textile products in general terms and only mentioned Regulations Nos 1039/71 and 1480/77 in the antipenultimate recital, and by the inclusion of cotton yarn in List A. In my opinion, therefore, cotton yarn was omitted from List B because the Commission did not consider that there was any process or operation to which it was subjected which satisfied the criteria set out in Article 5 of Regulation No 802/68 without affecting the tariff classification of the goods. In consequence, the origin of the goods in question in this case is prevented from being Germany by virtue of Regulation No 749/78, since they were not included in List B.

In deciding the criteria which determine the origin of textile products falling within Chapters 51 and 53 to 62 of the CCT, the Commission did not limit itself to changes in tariff heading. If it had done so, such an approach might have been in conflict with what the Court said in Case 49/76, Gesellschaft fiir Überseehandel v Handelskammer Hamburg [1977] ECR 41 at page 5 of the judgment. Instead, it lists as its starting point “one complete process”. Some processes which resulted in a change of tariff heading were excluded unless specific conditions were fulfilled. Others were accepted even if they did not result in a change of tariff heading.

In Article 5 the country of origin of goods, in the production of which two or more countries are involved, is determined by reference to the place of performance of the “last substantial process or operation that is economically justified”, subject to the condition that this process or operation (1) is “carried out in an undertaking equipped for the purpose” and (2) results “in the manufacture of a new product” or represents “an important stage of manufacture”. There seems to be little doubt but that (a) the finishing processes to which the cotton yarn is subjected do constitute, either separately or together, a “process or operation”, (b) that they are economically justified, i.e. due to the increase in the commercial value of the goods; (it is arguable that there must also be some economic justification for carrying out the process or operation in the country in question rather than at some other place but I, for present purposes, am prepared to assume that this also is so); (c) that they are “last” because no further processing or operation takes place prior to marketing or use (other than packaging); and (d) that they are carried out in an undertaking equipped for the purpose. There remains the question whether the process was “substantial” and did “result in the manufacture of a new product” or represent “an important stage of manufacture”.

In the Überseehandel case the Court held that the last process or operation is only “substantial” for the purposes of Article 5 “if the product resulting therefrom has its own properties and a composition of its own, which it did not posses before that process or operation” (paragraph 6 of the judgment). The Court went on to say that, “in providing that the said process or operation must, in order to confer a particular origin, result in the manufacture of a new product or represent an important stage of manufacture, ... Article 5 shows in fact that activities affecting the presentation of the product for the purposes of its use, but which do not bring about a significant qualitative change in its properties, are not of such a nature as to determine the origin of the said product”. In taking the view that the substantial nature of a process or operation is to be determined by its result, the Court appears to have linked this requirement to the further requirement that the process or operation must result in the manufacture of a new product or represent an important stage of manufacture. (See also Case No 34/78, Yoshida v Kamer van Koophandel en Fabrieken voor Friesland [1979] ECR 115 and Case 114/78, Yoshida v Industrie- und Handelskammer Kassel [1979] ECR 151).

The result of these cases seems to be that, for a process or operation to satisfy Article 5, it must either endow the processed product with specific properties it did not possess beforehand or effect a significant qualitative change in properties which the product did possess before it was subjected to the process or operation.

In my opinion, the processes involved in this case, with the exception of spooling, do satisfy the test laid down in Article 5 ; gassing reduces the weight of the yarn and makes it smoother, with consequent effects on the fabric woven from the yarn; the increase in strength resulting from mercerizing, which is of the order of 30 to 40 %, is in my view a significant qualitative change; dyeing was accepted by the Commission as an operation which would affect origin in both Regulation No 1039/71 and Regulation No 749/78 in the case of woven fabrics (where accompanied by finishing operations such as mercerizing) and no satisfactory explanation has been given as to why the same does not apply in the case of cotton yarn. Accordingly the products imported into France are to be regarded by Article 5 of Regulation No 802/68 as originating in Germany.

It follows that, in failing to make provision for these processes in relation to cotton yarn in Regulation No 749/78, the Commission did not give effect to Article 5 of Regulation No 802/68; to the extent of that omission the Regulation is invalid and these goods are not prevented by Regulation No 749/78 from having originated in Germany. It is therefore not necessary to go further and consider whether Regulation No 749/78 is capable of being a measure prohibited by Article 30.

If it were necessary to consider whether Regulation No 749/78 constituted a measure prohibited by Article 30, I would be of the view that it has not been shown to be so on the facts of this case. A mere definition of origin does not seem to me of itself to amount to a measure having equivalent effect to a quantitative restriction which is capable of hindering intra-Community trade directly or indirectly, actually or potentially. The way in which and the purpose for which the definition is used by a Member State may be capable of being such a measure but that is not the question referred in this case.

For the reasons I have given, it is my opinion that the question referred should be answered on the lines: Regulation No 749/78 is invalid to the extent that it does not provide that gassing, mercerizing and dyeing are working or processing operations which may confer the status of originating products on cotton yarn which has undergone such operations.