Parties
Grounds
Operative part

Parties

In Case T-2/11,

Portuguese Republic, represented by L. Inez Fernandes, M. Figueiredo and J. Saraiva de Almeida, acting as Agents,

applicant,

v

European Commission, represented by P. Guerra e Andrade and P. Rossi, acting as Agents,

defendant,

APPLICATION for the annulment of Commission Decision 2010/668/EU of 4 November 2010 excluding from European Union financing certain expenditure incurred by the Member States under the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF), under the European Agricultural Guarantee Fund (EAGF) and under the European Agricultural Fund for Rural Development (EAFRD) (OJ 2010 L 288, p. 24), in that it applies to the Portuguese Republic a financial correction to the POSEI measure, for the financial years 2005, 2006 and 2007, in the total amount of EUR 743 251.25,

THE GENERAL COURT (Eighth Chamber),

composed of L. Truchot, President, M.E. Martins Ribeiro (Rapporteur) and A. Popescu, Judges,

Registrar: C. Kristensen, Administrator,

having regard to the written procedure and further to the hearing on 12 September 2012,

gives the following

Judgment

Grounds

Legal context

EU legislation governing the financing of the common agricultural policy

1. The basic legislation relating to the financing of the common agricultural policy is constituted, so far as concerns expenditure incurred from 1 January 2000, by Council Regulation (EC) No 1258/1999 of 17 May 1999 on the financing of the common agricultural policy (OJ 1999 L 160, p. 103), which replaced Council Regulation (EEC) No 729/70 of 21 April 1970 on the financing of the common agricultural policy (OJ 1970 L 94, p. 13), which was applicable to expenditure incurred before that date.

2. Under Article 1(2)(b) and Article 2(2) of Regulation No 1258/1999, the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (‘EAGGF’) finances intervention intended to stabilise the agricultural market undertaken in accordance with EU rules within the framework of the common organisation of agricultural markets.

3. Article 7(4) of Regulation No 1258/1999 provides as follows:

‘The Commission shall decide on the expenditure to be excluded from the Community financing referred to in Articles 2 and 3 where it finds that expenditure has not been effected in compliance with Community rules.

Before any decision to refuse financing is taken, the findings from the Commission’s inspection and the Member State’s replies shall be notified in writing, following which the two parties shall attempt to reach agreement on the action to be taken.

If agreement is not reached, the Member State may request opening of a procedure aimed at reconciling each party’s position within four months. A report of the outcome of the procedure shall be given to the Commission, which shall examine it before deciding on any refusal of financing.

The Commission shall assess the amounts to be excluded on the basis of the gravity of the non-conformity recorded. It shall take due account of the nature and gravity of the infringement and of the financial damage caused to the Community.

Financing may not be refused for:

(a) expenditure referred to in Article 2 effected prior to 24 months preceding the Commission’s written communication of the results of those checks to the Member State concerned;

(b) expenditure for a measure or action referred to in Article 3 in respect of which the final payment was effected prior to 24 months preceding the Commission’s written communication of the results of those checks to the Member State concerned.

However, the fifth subparagraph shall not apply to the financial consequences:

(a) of irregularities as referred to in Article 8(2);

(b) concerning national aids, or infringements, for which the procedures referred to in Articles 88 [EC] and 226 [EC] have been initiated.’

4. Article 8 of Regulation No 1258/1999 provides:

‘1. Member States shall, in accordance with national laws, regulations and administrative provisions, take the measures necessary to:

(a) satisfy themselves that transactions financed by the [EAGGF] are actually carried out and executed correctly;

(b) prevent and pursue irregularities;

(c) recover sums lost as a result of irregularities or negligence.

The Member States shall inform the Commission of the measures taken for those purposes and in particular of the state of the administrative and judicial procedures.

2. In the absence of total recovery, the financial consequences of irregularities or negligence shall be borne by the Community, with the exception of the consequences of irregularities or negligence attributable to administrative authorities or other bodies of the Member States.

The sums recovered shall be paid to the accredited paying agencies and deducted by them from the expenditure financed by the [EAGGF]. The interest on sums recovered or paid late shall be paid into the [EAGGF].

3. The Council, acting by a qualified majority on a proposal from the Commission, shall adopt general rules for the application of this Article.’

5. Article 9 of Regulation No 1258/1999 states:

‘1. Member States shall make available to the Commission all information required for the proper working of the [EAGGF] and shall take all suitable measures to facilitate the supervision which the Commission may consider necessary to undertake within the framework of the management of Community financing, including inspections on the spot.

Member States shall communicate to the Commission provisions laid down by law, regulation or administrative action which they have adopted for the application of legal acts of the Community relating to the common agricultural policy in so far as those acts have financial consequences for the [EAGGF].

2. Without prejudice to the supervision effected by the Member States in accordance with national provisions laid down by law, regulation or administrative action and without prejudice to Article 248 [EC], or to any inspection organised on the basis of Article 279(c) [EC], authorised representatives appointed by the Commission to carry out inspections on the spot shall have access to the books and all other documents, including information created or stored in electronic form, relating to expenditure financed by the [EAGGF].

In particular, they may check the following:

(a) compliance of administrative practices with Community rules;

(b) whether the requisite supporting documents exist and tally with the transaction financed by the [EAGGF];

(c) the conditions under which transactions financed by the [EAGGF] are carried out and checked.

The Commission shall give sufficient prior notice of an inspection to the Member State concerned or the Member State within whose territory the inspection is to take place. Agents of the Member State concerned may participate in such inspection.

At the request of the Commission and with the agreement of the Member State, inspections or inquiries concerning the transactions referred to in this Regulation shall be carried out by the competent authorities of that Member State. Officials of the Commission may also participate.

To make verification more effective, the Commission may, with the agreement of the Member States concerned, arrange for the administrative authorities of those States to participate in certain inspections or inquiries.

3. The Council, acting by a qualified majority on a proposal from the Commission, shall, as far as is necessary, lay down general rules for the application of this Article.’

6. Regulation No 1258/1999 was repealed by Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy (OJ 2005 L 209, p. 1), which came into force, according to Article 49, on the seventh day following that of its publication in the Official Journal of the European Union , 18 August 2005.

7. However, Article 47 of Regulation No 1290/2005 stated that ‘Regulation ... No 1258/1999 continue[d] to apply until 15 October 2006 to expenditure incurred by Member States and until 31 December 2006 for expenditure incurred by the Commission’.

8. Article 8(1) of Commission Regulation (EC) No 1663/95 of 7 July 1995 laying down detailed rules for the application of Regulation No 729/70 regarding the procedure for the clearance of the accounts of the EAGGF Guarantee Section (OJ 1995 L 158, p. 6), as amended inter alia by Commission Regulation (EC) No 2245/1999 of 22 October 1999 (OJ 1999 L 273, p. 5), provides:

‘If, as a result of an enquiry, the Commission considers that expenditure has not been effected according to Community rules, it shall notify the Member State concerned of the results of its checks and indicate the corrective measures to be taken to ensure future compliance.

The communication shall refer to this Regulation. The Member State shall reply within two months and the Commission may modify its position in consequence. In justified cases, the Commission may extend the period allowed for reply.

After expiry of the period allowed for reply, the Commission shall invite the Member State to a bilateral discussion and the parties shall endeavour to reach agreement on the measures to be taken and on an evaluation of the gravity of the infringement and the financial loss to the Community. Following that discussion and any deadline after the discussion fixed by the Commission, after consultation of the Member States, for the provision of further information or, where the Member State does not accept the invitation to a meeting before the deadline set by the Commission, after that deadline has passed, the Commission shall formally communicate its conclusions to the Member State, referring to Commission Decision 94/442/EC. Without prejudice to the fourth subparagraph of this paragraph, that communication shall include an evaluation of any expenditure the Commission intends to exclude under Article 5(2)(c) of Regulation ... No 729/70.

The Member State shall inform the Commission as soon as possible of the corrective measures adopted to ensure compliance with Community rules and the date of their entry into force. The Commission shall, as appropriate, adopt one or more Decisions under Article 5(2)(c) of Regulation ... No 729/70 to exclude expenditure affected by non-compliance with Community rules up to the date of entry into force of the corrective measures.’

9. Article 11 of Commission Regulation (EC) No 885/2006 of 21 June 2006 laying down detailed rules for the application of Council Regulation (EC) No 1290/2005 as regards the accreditation of paying agencies and other bodies and the clearance of the accounts of the EAGF and of the EAFRD (OJ 2006 L 171, p. 90) provides:

‘1. When, as a result of any inquiry, the Commission considers that expenditure was not effected in compliance with Community rules, it shall communicate its findings to the Member State concerned and indicate the corrective measures needed to ensure future compliance with those rules.

The communication shall make reference to this Article. The Member State shall reply within two months of receipt of the communication and the Commission may modify its position in consequence. In justified cases, the Commission may agree to extend the period for reply.

After expiry of the period for reply, the Commission shall convene a bilateral meeting and both parties shall endeavour to come to an agreement as to the measures to be taken as well as to the evaluation of the gravity of the infringement and of the financial damage caused to the Community budget.

2. Within two months from the date of the reception of the minutes of the bilateral meeting referred to in the third subparagraph of paragraph 1, the Member State shall communicate any information requested during that meeting or any other information which it considers useful for the ongoing examination.

In justified cases, the Commission may, upon reasoned request of the Member State, authorise an extension of the period referred to in the first subparagraph. The request shall be addressed to the Commission before the expiry of that period.

After the expiry of the period referred to in the first subparagraph, the Commission shall formally communicate its conclusions to the Member State on the basis of the information received in the framework of the conformity clearance procedure. The communication shall evaluate the expenditure which the Commission envisages to exclude from Community financing under Article 31 of Regulation ... No 1290/2005 and shall make reference to Article 16(1) of this Regulation.

3. The Member State shall inform the Commission of the corrective measures it has undertaken to ensure compliance with Community rules and the effective date of their implementation.

The Commission, after having examined any report drawn up by the Conciliation Body in accordance with Chapter 3 of this Regulation, shall adopt, if necessary, one or more decisions under Article 31 of Regulation ... No 1290/2005 in order to exclude from Community financing expenditure affected by the non-compliance with Community rules until the Member State has effectively implemented the corrective measures.

When evaluating the expenditure to be excluded from Community financing, the Commission may take into account any information communicated by the Member State after the expiry of the period referred to in paragraph 2 if this is necessary for a better estimate of the financial damage caused to the Community budget, provided that the late transmission of the information is justified by exceptional circumstances.

4. As regards the EAGF, the deductions from the Community financing shall be made by the Commission from the monthly payments relating to the expenditure effected in the second month following the decision pursuant to Article 31 of Regulation ... No 1290/2005.

As regards the EAFRD, the deductions from the Community financing shall be made by the Commission from the following intermediate payment or the final payment.

However, at the Member State’s request and where warranted by the materiality of the deductions, and after consultation of the Committee on the Agricultural Funds, the Commission may set a different date for the deductions.

5. This Article shall apply, mutatis mutandis, to assigned revenues within the meaning of Article 34 of Regulation ... No 1290/2005.’

10. It is apparent from Article 18 of Regulation No 885/2006 that Regulation No 1663/95 continued to apply to the clearance of the accounts for the financial year 2006 in accordance with Article 7(3) of Regulation No 1258/1999.

11. Council Regulation (EC) No 1453/2001 of 28 June 2001 introducing specific measures for certain agricultural products for the Azores and Madeira and repealing Regulation (EEC) No 1600/92 (Poseima) (OJ 2001 L 198, p. 26), adopts a programme of specific measures for those outer regions of the Union.

12. Moreover, Commission Regulation (EC) No 43/2003 of 23 December 2002 laying down detailed rules for applying Council Regulations (EC) No 1452/2001, (EC) No 1453/2001 and (EC) No 1454/2001 as regards aid for the local production of crop products in the outermost regions of the European Union (OJ 2003, L 7, p. 25), implements aid for the local production of crop products in the outermost regions of the European Union.

13. Recital 26 in the preamble to Regulation No 43/2003 provides that ‘[t]he minimum number of growers to undergo on-the-spot checks under the various aid schemes should be determined’.

14. Recital 27 in the preamble to that regulation states:

‘The sample for the minimum rate of on-the-spot checks should be selected partly on the basis of a risk analysis and partly at random. The main factors to be taken into consideration for the risk analysis should be specified.’

15. Recital 28 in the preamble to Regulation No 43/2003 states that ‘[w]here significant irregularities are found, the level of the on-the-spot checks should be increased during the current and the following year in order to attain an acceptable level of assurance that the aid applications concerned are correct’.

16. Article 58(1) of Regulation No 43/2003 provides:

‘Verification shall be by administrative and on-the-spot checks. Administrative checks shall be exhaustive and shall include cross-checks wherever appropriate, inter alia with data from the integrated administration and control system. Based on a risk analysis, the na tional authorities shall perform on-the-spot checks by sampling at least 10% of aid applications.

In all appropriate cases, Member States shall make use of the integrated administration and control system established by Regulation (EEC) No 3508/92.’

17. Article 60 of Regulation No 43/2003, entitled ‘Selection of applications to be checked on the spot’, states:

‘1. Growers shall be selected to undergo on-the-spot checks by the competent authority on the basis of a risk analysis and the representativeness of the aid applications submitted. The risk analysis shall take account of:

(a) the amount of aid;

(b) the number of agricultural parcels, the area covered by the application or the quantity produced, transported, processed or marketed;

(c) changes on the previous year;

(d) the findings of checks performed in the preceding years;

(e) other factors to be defined by the Member States.

To provide the element of representativeness, Member States shall randomly select between 20 and 25% of the minimum number of growers to be subjected to on-the-spot checks.

2. The competent authority shall keep records on the reasons for the selection of each farmer for an on-the-spot check. The inspector carrying out the on-the-spot check shall be informed accordingly prior to the commencement of the on-the-spot check.’

Commission Guidelines

18. The Commission guidelines for the application of financial corrections were set out in Commission Document No VI/5330/97 of 23 December 1997, entitled ‘Guidelines for the calculation of financial consequences within the framework of the clearance of the accounts of the EAGGF Guarantee’.

19. Annex 2 to Document No VI/5330/97, relating to the financial consequences, within the framework of the clearance of accounts of the EAGGF Guarantee, of deficiencies in controls carried out by the Member States, in the section entitled ‘Introduction’, states:

‘When the Commission finds that a particular payment concerns a claim which fails to comply with Community rules, the financial consequences are clear: unless the irregular payment had already been detected by national control bodies and the appropriate remedial and recovery measures taken (see Annex 4), the Commission must refuse its financing by the Community budget. When consequences are drawn from the examination of expenditure comprising a large number of files, whenever possible, the refusal is calculated on the basis of an extrapolation of the results of an examination of a representative sample of files. The same extrapolation method should apply to all Member States, including confidence and materiality level, stratification of the population, sample size and evaluation of the errors within the sampling with regard to the total financial implications.

When a Member State fails to comply with the Community regulations concerning the verification of the eligibility of claims, then this very failure means that the payments infringe the Community rules applicable to the measure concerned, and the general requirement under Article 8 of Regulation 729/70 requiring Member States to detect and prevent irregularities. It does not necessarily follow that all the claims paid were irregular, but it does mean that the risk of irregular payments being charged to the [EAGGF] is increased. Whilst, in certain flagrant cases, the Commission might be entitled to refuse all the expenditure concerned if the controls required by a regulation are not effected, in a number of cases the amount refused would in all probability exceed the financial loss suffered by the Community. An assessment of the financial loss is therefore to be made when evaluating financial corrections.

...’

20. Annex 2 to Document No VI/5330/97 states, in its section entitled ‘Evaluation based on errors in individual files’:

‘On the basis of procedures already established under internal guidelines, the calculations of the financial correction utilise one of the following techniques:

(a) disallowance of an individual claim for which the required control has not been undertaken;

(b) disallowance of a sum calculated by extrapolating the results of checks carried out on a representative sample of files to all the files from which the sample was taken, limited to the administrative area for which the same deficiency may reasonably be expected to occur. The Member State is given the opportunity to present evidence that the results of the extrapolation do not correspond to those obtained from an examination of all the files from which the sample was taken.

…’

21. Annex 2 to Document No VI/5330/97 states, in its section entitled ‘Evaluation based on the risks of financial loss: flat-rate corrections’:

‘As the systems audit approach has become more widely applied, the Commission’s services have had recourse increasingly to an assessment of the risk which a system deficiency presents. When the actual level of irregular payments, and thus the amount of financial losses suffered by the Community cannot be determined, the Commission has applied, since the clearance of the 1990 financial year, flat-rate corrections of 2%, 5% or 10% of the expenditure declared, depending on the amplitude of the risk of loss. Higher rates of correction, up to 100%, may be decided in exceptional cases. The Commission’s prerogative to apply corrections of this nature has been confirmed by the Court of Justice when deciding on appeals against the annual clearance decisions (e.g. the Judgment in Case C-50/94).

…’

22. Annex 2 to Document No VI/5330/97 states, in its section entitled ‘Guidelines for the application of flat-rate corrections’:

‘Flat-rate corrections may be envisaged when the information resulting from the enquiry does not permit the auditor to evaluate the loss by an extrapolation of determined losses, by statistical means, or by reference to other verifiable data, but does enable him to conclude that the Member State has failed to carry out adequate verification of the eligibility of claims paid.

…

Flat-rate corrections are not appropriate when the Member States’ own control services [have found] such failures, under the condition mentioned in Annex 4.

…

When one or more key controls are not applied or are applied so poorly or so infrequently that they are ineffective in determining whether claims are eligible or preventing irregularities, a correction of 10% is justified as it can reasonably be concluded that there is a high risk of wide-spread loss to the [EAGGF].

When all key controls are applied, but not in the number, frequency or depth required by the legislation, an adjustment of 5% is justified as it can reasonably be concluded both that they do not provide the expected degree of assurance that claims are regular and that the risk to the [EAGGF] is significant.

When a Member State has adequately performed the key controls but completely failed to carry out one or more ancillary controls, a correction of 2% is justified since there is less risk of loss to the [EAGGF] and the infringement is less serious.

A correction of 2% is also justified when a Member State has failed to take measures to improve the application of ancillary controls, or measures which are derived from Community regulations, and the Commission has notified the Member State concerned, in particular under Article 8 of Regulation 1663/95, that it is required to take them in order to attain the result sought by the regulations, or to attain a reasonable level of protection against fraud and irregularity or to ensure proper control over Community funds.

…

The rate of correction should be applied to that part of the expenditure placed at risk. When the deficiency results from a failure by the Member State to adopt an appropriate control system, then the correction should be applied to the entire expenditure for which that control system was required. When there is reason to suppose that the deficiency is limited to that of a department or region’s application of the control system adopted by the Member State, the correction should be limited to the expenditure controlled by that department or region.

…’

23. The Commission also states, in Annex 2 to Document No VI/5330/97, in its section entitled ‘Border-line cases’:

‘...

Where the deficiencies arose from difficulties in the interpretation of Community texts, except in cases where it should reasonably be expected that the Member State raise such difficulties with the Commission, and when the national authorities took effective steps to remedy the deficiencies as soon as they were brought to light, this mitigating factor may be taken into account and a lower rate or no correction may be proposed.

...’

24. Finally, Annex 4 to Document No VI/5330/97, entitled ‘Treatment in the clearance of the accounts of the findings of the Member States’ control bodies’, states:

‘…

The findings of National control bodies will not in themselves lead to financial consequences in the clearance of accounts. The findings will be treated as evidence that the National control procedures are operating in compliance with the Regulations, and are working effectively. The Member State is however expected to draw the necessary consequences from the reports’ conclusions, including the remedying of any deficiency found in the procedures applied by a National service, the re-examination of all operations affected by the deficiency, and the recovery of any amount incorrectly paid, or found to be irregular. It is evident that failures to give a full follow-up to the reports renders ineffective the controls undertaken, and therefore it is in these circumstances, but in these only, that the clearance of accounts department would consider financial consequences.’

Background to the dispute and the contested decision

25. By letter of 8 March 2005, the Commission of the European Communities, in accordance with Article 9(2) of Regulation No 729/70 and with Regulation No 1258/1999, informed the Portuguese authorities that an inspection visit would be made between 11 and 15 April 2005 which would be concentrated on the years 2003 and 2004 and would relate to monitoring, including the procedures established and the controls actually carried out. The Commission also asked to be sent information relating to those years.

26. Between 11 and 15 April 2005, the Commission’s services made that visit to Portugal in order to monitor the implementation of the specific measures laid down in Regulation No 1453/2001 concerning certain agricultural products for the Azores and Madeira (Portugal).

27. Following that inspection, the Commission, by registered letter with form of acknowledgment of receipt of 5 December 2006 (‘the first communication of 5 December 2006’), informed the Portuguese authorities of the result of the inspection visit and stated that that letter was sent pursuant to Article 11 of Regulation No 885/2006. An annex, entitled ‘Observations and recommendations’, which included the conclusions of the inspection carried out at the central authorities in Lisbon (Portugal) and at the local authorities, relating to the aid scheme for specific measures concerning certain agricultural products for the Azores and Madeira (Poseima), was enclosed with that letter.

28. It is apparent from the first communication of 5 December 2006 that the Commission considered that the Portuguese authorities had not fully met the requirements of the Community legislation and that corrective measures were necessary to ensure future compliance with those requirements. The Commission asked to be informed of the corrective measures already adopted and of the schedule for their implementation. Moreover, the Commission stated that it was proposed to exclude from Community financing all or part of the expenditure financed by the Guarantee Section of the EAGGF, and that that exclusion might concern expenditure incurred during the period commencing 24 months before the date on which that letter was first received. Moreover, it was stated that the deficiencies found would serve as a basis for calculating the financial correction relating to the expenditure incurred until the appropriate corrective measures were implemented.

29. In the observations and recommendations contained in the annex to the first communication of 5 December 2006, the Commission stated, inter alia, as regards the ‘area checks’:

‘The introduction of the [geographic information system] combined with the lack of a land register and also the extremely uneven lie of the land do not make it easy to take measurements particularly where the plot is only partially planted (as in potato growing), [which] may limit the effectiveness of the checks. It was found that, in the case of on-the-spot checks of plots eligible for aid, the inspectors relied only on the basis [of the geographic information system]. This is a good tool to use for checking plots, but must be accompanied by physical measurements to make them and accurate and reliable.

The area checks were carried out by the Madeiran authorities on the basis of a sample representing at least 10% of the aid applications, as required under Article 58 of Regulation No 43/2003. The results of those checks reveal a very high number of aid applications wholly or partially refused. In 2004, for example, out of a sample representing 10.13% of the 5 825 aid applications for potato growing, 19.66% of aids for that sample were refused in whole and 16.10% refused in part, which represents an error rate of 36% of the areas checked (those results are even more striking in the case of sugar cane and willow cultivation. On the basis of these findings, it is clear that the minimum rate of checks carried out by the Portuguese authorities was not sufficient [in order] to protect [the interests] of the [EAGGF]. It was considered that the lack of an increase during 2004 constitutes a deficiency in the control system.

As regards the control system set up for 2005, the Portuguese authorities are requested to provide a list of applicants indicating those subject to an on-the-spot check (a selection of check reports will be made subsequently) and a summary showing the number of applicants per product, the number of applicants checked, the number of irregularities found, separating those for which aid was refused in part and [those for which aid was refused] in whole. An indication of the areas involved would also be useful in order for the errors to be assessed in financial terms.’

30. The Commission also stated, in the annex to the first communication of 5 December 2006, that the Portuguese authorities were advised to make more frequent use of physical measuring when checking areas, such as the GPS or measuring tape.

31. By letter of 7 February 2007, the Portuguese authorities replied that the errors detected during the on-the-spot checks related to very small plots used for various horticultural crops, which made it very difficult to state accurately the area used for the crop which was the subject of the aid. Accordingly, the Portuguese authorities pointed out that the average area of a farm was 0.4 hectares and that this was divided into four or five plots: the average area per plot was therefore very small, 0.8 hectares, and a very large number of plots had an area of between 0.1 and 0.5 hectares. It follows that a tiny error in the delimitation or measurement of the plot would result in a significant error in terms of percentage of the actual area. The Portuguese authorities pointed out that, under Regulation No 43/2003, the margin of error for control, which was 3%, was very small for the land regime of the Autonomous Region of Madeira. By way of example, in the case of a plot of 0.01 hectares, an irregularity giving rise to a total penalty (20%) would correspond to 0.002 hectares, an area which is impossible to record in the computer application, so that it should be regarded as negligible. That letter also contained an annex I, by which the Portuguese authorities sent the Commission the information which it requested in paragraph 3 of the annex to the first communication of 5 December 2006 (see paragraph 29 above).

32. At a bilateral meeting between the Commission’s services and the Portuguese authorities held in Brussels on 5 July 2007, the minutes of which were drawn up on 25 October 2007 and sent to the Portuguese authorities on 31 October 2007, the Commission drew attention to the high rate of errors found during the on-the-spot checks carried out by the regional authorities of Madeira and stated that such rates of error should have led those authorities to increase the rate of checks in order better to ensure that entitlement to Community aid and the grant of that aid were in accordance with the legislation. The Portuguese authorities pointed out that, since the average area of a farm in Madeira is very small, an error in the measurement of the plot, albeit insignificant in terms of area, results in a very high rate of error. They pointed out that the rate of on-the-spot checks in relation to applications had been observed. Those checks represented, in terms of area, rates of between 25% and over 50%. Moreover, the checks referred to were carried out before payment, so that aid was reduced and sanctions applied. The forecast of the rate of errors in order to determine the possible risk to the EAGGF is therefore unfounded. Moreover, from 2006, the results of the checks (measuring) were integrated into the geographic information system (GIS) which made it possible to have a more reliable database of actual areas.

33. The Commission, in order better to assess the situation, asked the Portuguese authorities, during that meeting of 5 July 2007, to send it, per sector (crop) and per marketing year (from 2005), the number of aid applications and corresponding areas, the percentage of beneficiaries subject to on-the-spot checks, the area percentage covered by those checks, the rate of errors and the resulting partial and total penalties, and also the percentage of those errors in terms of payments made. The Commission added that, on the basis of the information provided by the Portuguese authorities, it would determine the extent of the financial risk of the anomalies found and the level of expenditure to be excluded from Community financing.

34. By letter of 20 December 2007, the Portuguese Republic sent the requested information to the Commission, in particular a table summarising the inspections which had been carried out during the marketing years 2005 and 2006.

35. By letter of 27 October 2009, the Commission sent the Portuguese Republic a formal communication. Following the bilateral meeting, the Commission, taking into account the additional information communicated subsequently by the Portuguese authorities, confirmed its view that the grant of aid for the financial years 2005, 2006 and 2007, as regards the specific measures concerning certain agricultural products in favour of Madeira, had not been made in accordance with Community provisions. In the annex to the letter of 27 October 2009, the Commission stated that the data provided by the Portuguese authorities relating to the financial years 2005 and 2006 made it possible, inter alia, to conclude that the ‘rate of errors’ which had led to the total or partial refusal of financing had been, in every case, higher than 40% in terms of area. An inspection carried out previously (inquiries 2001/006 and 2001/09) had led to similar conclusions. The Commission considered that, as the rate of errors in respect of several years was very high, the Portuguese authorities should have increased the rate of on-the-spot checks, in order to protect the EAGGF against the risk of overpayment. It considered that the rate of checks made, at a statistical and geographical level, was sufficiently representative to permit an extrapolation of the result in relation to the applications which had not been subject to an on-the-spot check. The Commission proposed to exclude the sum of EUR 743 251.25 in expenditure and, consequently, to impose a financial correction in respect of the financial years 2005, 2006 and 2007. The attention of the Portuguese authorities was drawn to the fact that they could submit a request for conciliation to the Conciliation Body, pursuant to Article 16 of Regulation No 885/2006, which provides for that opportunity.

36. The Portuguese Republic did not request the opening of a conciliation procedure.

37. On 19 July 2010, the Commission drew up the summary report, which contains the results of the checks carried out, the Commission’s complaints and the reply of the Portuguese authorities.

38. First of all, that summary report, which mentions the fact that the position of the Commission’s Directorate General (DG) for Agriculture remained unchanged, points out the finding notified in the first communication of 5 December 2006 resulting from the examination and analysis of the results of the check carried out by the Madeiran authorities (see paragraph 29 above). Next, as regards the check data provided by the Portuguese Republic for the years 2005 and 2006, the Commission states that Article 58 of Regulation No 43/2003 provides that on-the-spot checks must relate to at least 10% of aid applications and that those carried out by the Portuguese authorities represented, depending on the sectors concerned, between 10 and 30% of aid applications. In terms of area checked, this represented between 8 and 50% of the area which received the benefit of a Community financial intervention and the rate of errors which resulted in a total or partial refusal of financing was in every case higher than 40% in terms of area. The Commission deduced from these details that the minimum rate of checks did not protect the EAGGF from the risk of overpayments. It referred, in that regard, to recitals 26 to 28 in the preamble to Regulation No 43/2003 and concluded that, in view of the very high rates of errors committed over several years, the Portuguese authorities should have increased the rate of on-the-spot checks in order to confirm that the results obtained were representative. Finally, it considered that, since the rates of checks carried out both on a statistical and geographical level (Madeira) were sufficiently representative, they permitted extrapolation to the aid applications which had not been subject to an on-the-spot check.

39. It was in those circumstances that the Commission adopted Decision 2010/668/EU of 4 November 2010 excluding from European Union financing certain expenditure incurred by the Member States under the Guarantee Section of the EAGGF, under the European Agricultural Guarantee Fund (EAGF) and under the European Agricultural Fund for Rural Development (EAFRD) (OJ 2010 L 288, p. 24, ‘the contested decision’), including expenditure incurred by the Portuguese Republic in connection with the POSEI measure for the financial years 2005 to 2007 of a total amount of EUR 743 251.25, at issue in the present case.

Procedure and forms of order sought by the parties

40. By application lodged at the Registry of the General Court on 4 January 2011, the Portuguese Republic brought the present action.

41. The Commission lodged a defence at the Registry of the General Court on 22 March 2011. The Portuguese Republic lodged a reply at the Court Registry on 9 May 2011 and the Commission lodged a rejoinder on 5 July 2011.

42. The Portuguese Republic claims that the Court should:

– annul the contested decision in that it applies to the applicant a financial correction relating to the POSEI measure for the financial years 2005 to 2007 of a total amount of EUR 743 251.25;

– order the Commission to pay the costs.

43. The Commission contends that the Court should:

– dismiss the action;

– order the Portuguese Republic to pay the costs.

44. Upon hearing the Report of the Judge-Rapporteur, the General Court (Eighth Chamber) decided to open the oral procedure without any preparatory inquiry. The parties presented oral argument and answered the questions put to them by the Court at the hearing on 12 September 2012.

Law

45. The Portuguese Republic relies on four pleas in law in support of its application: the first alleges infringement of Article 7(4) of Regulation No 1258/1999 and Article 11 of Regulation No 885/2006, the second alleges misinterpretation of recital 28 in the preamble to Regulation No 43/2003 and infringement of Article 7(4) of Regulation No 1258/1999, the third alleges infringement of Article 7(4) of Regulation No 1258/1999 and the fourth alleges infringement of the principles of equal treatment and proportionality.

The first plea, alleging infringement of Article 7(4) of Regulation No 1258/1999 and Article 11 of Regulation No 885/2006

46. According to the Portuguese Republic, the first communication of 5 December 2006, sent pursuant to Article 11 of Regulation No 885/2006, does not fully comply with that provision, since it does not state the results of the verifications relating to the years 2005 and 2006. The Portuguese authorities also state that the Commission had informed them, by letter of 8 March 2005, that the inspection would focus on the years 2003 and 2004. The first communication of 5 December 2006 does not contain, for the year 2005, either the results of the verifications carried out by the Commission during its inspection, or observations in that regard, or the slightest reservation in relation to that year, which the Commission, moreover, acknowledges in the summary report in which it states that it had asked the Portuguese authorities to provide it with check data for the years 2005 and 2006. As regards the year 2006, the first communication of 5 December 2006 is silent and contains no observation or even a request for check data relating to that year.

47. In those circumstances, the Portuguese authorities state that they were not able to demonstrate that the findings of the Commission were incorrect in so far as concerns the years 2005 and 2006 or to correct any deficiencies in order to comply with the EU rules in the future, so that, in accordance with the case-law (judgment of 17 June 2009 in Case T-50/07 Portugal v Commission , not published in the ECR), they did not have the benefit of the procedural guarantee accorded to Member States by Article 7(4) of Regulation No 1258/1999 and Article 11 of Regulation No 885/2006. Since the first communication of 5 December 2006 does not make the Commission’s reservations perfectly clear, it therefore could not perform its function as a warning, as required by the case-law.

48. Moreover, the Commission does not maintain that the irregularities found during 2005 and 2006 follow on from those found during 2004. As the first communication of 5 December 2006 was received only in December 2006, that means that the Portuguese authorities did not have time to adopt any corrective measures to take effect in 2005 and 2006.

49. Moreover, since the Commission did not carry out verifications concerning the years 2005 and 2006, the Portuguese Republic states that it could not know whether the reservations expressed in 2004 were still valid for the following two years, the data for which was communicated to it only after the meeting of 5 July 2007, so that the Portuguese Republic could not exercise its rights of defence in respect of those two years.

50. The Commission points out that, where irregularities justifying the application of a financial correction persist after the date of the written communication of the results of the checks, it is entitled and even obliged to take account of that situation when it determines the period to which the financial correction in question is to relate. It therefore considers that the conditions permitting it to make an extrapolation were satisfied.

51. The Commission maintains that, according to the case-law, since the inspection had been carried out between 11 and 15 April 2005, it was unable to examine the check data for 2005, which were not yet available. However, it asked the Portuguese authorities, in the first communication of 5 December 2006, to provide it with the data relating to 2005. The Commission states that the data provided by those authorities on 20 December 2007 concerning the marketing years 2006 and 2007 had confirmed the Commission’s verifications as regards the data for 2004, so that the problem was systemic. The persistence of rates of errors which were very high and showed a tendency to rise constituted an objective reason for applying an extrapolation. No right of defence of the Portuguese Republic is at issue in respect of the check data for 2005 and 2006, because it had itself supplied those data to the Commission.

52. By this plea, the Portuguese Republic is complaining, in essence, that the Commission applied a financial correction in respect of the marketing years 2005 and 2006 which are prior to the first communication of 5 December 2006, even though, in that communication, the Commission did not mention the results of the verifications relating to those marketing years. Therefore, the Portuguese authorities did not have the benefit of the procedural guarantee accorded to them by Article 7(4) of Regulation No 1258/1999 and Article 11 of Regulation No 885/2006 and were unable to exercise their rights of defence with regard to the two aforementioned years.

53. In answer to a question put by the Court, the applicant acknowledged, as recorded in the minutes of the hearing, that this plea sought the annulment of the contested decision only so far as concerns the financial correction made for the marketing years 2005 and 2006, that is to say, for the financial years 2006 and 2007, in the amounts of EUR 239 045.63 and EUR 266 137.96 respectively. On the other hand, the financial correction relating to the marketing year 2004, in the amount of EUR 238 067.66, which corresponds to the financial year 2005, is not covered by this plea.

54. It should be pointed out that it is apparent from the case-law that the final and conclusive decision on the clearance of accounts must be taken at the conclusion of a specific procedure giving effect to the audi alteram partem rule, during which the Member States concerned must be provided with all the guarantees necessary for them to present their point of view (Case C-61/95 Greece v Commission [1998] ECR I-207, paragraph 39, and Case C-245/97 Germany v Commission [2000] ECR I-11261, paragraph 47).

55. Moreover, it should also be pointed out that, according to settled case-law, the Commission is bound, in its relations with the Member States, to respect the conditions it has imposed on itself by implementing regulations. A failure to observe those conditions may, depending on its significance, deprive of its efficacy the procedural guarantee accorded to Member States by Article 7(4) of Regulation No 1258/1999 ( Portugal v Commission , paragraph 47 above, paragraph 27).

56. Moreover, the fifth subparagraph of Article 7(4) of Regulation No 1258/1999, on the one hand, and the first subparagraph of Article 8(1) of Regulation No 1663/95, on the other, refer to the same stage of the EAGGF accounts clearance procedure, that is to say, the sending of the first communication by the Commission to the Member State following the checks which it has carried out (Case C-170/00 Finland v Commission [2002] ECR I-1007, paragraph 27; see also Portugal v Commission , cited in paragraph 47 above, paragraph 28 and the case-law cited).

57. Article 11 of Regulation No 885/2006 sets out the various stages which must be gone through during the procedure for the clearance of EAGGF accounts. In particular, the first subparagraph of Article 11(1) of that regulation specifies the content of the written communication by which the Commission is to communicate the result of its enquiries to the Member States, before arranging the bilateral discussion (Case C-300/02 Greece v Commission [2005] ECR I-1341, paragraph 68, and judgment of 24 March 2011 in Case T-184/09 Greece v Commission , not published in the ECR, paragraph 40). Under that provision, the first communication must inform the Member State concerned of the results of the Commission’s investigations and indicate the corrective measures to be taken in order to ensure future compliance with the Community rules at issue.

58. In that regard, it should be pointed out that the EU judicature has held that the communication written pursuant to Article 8(1) of Regulation No 1663/95 must inform the Member State fully about the Commission’s reservations, so that it can fulfil the function as a warning accorded to it by the first subparagraph of that provision and by Article 7(4) of Regulation No 1258/1999 ( Portugal v Commission , cited in paragraph 47 above, paragraph 39; see also, to that effect, Case C-153/01 Spain v Commission [2004] ECR I-9009, paragraph 93, and judgment of 3 May 2012 in Case C-24/11 P Spain v Commission , not published in the ECR, paragraph 27).

59. It follows that, in the first communication referred to in Article 8(1) of Regulation No 1663/95, the Commission must state, with sufficient precision, the purpose of the investigation carried out by its services and the deficiencies found during that investigation, which may be invoked subsequently as evidence of the serious and reasonable doubt it entertains about the checks carried out by the national authorities or about the figures submitted by them, and which may, accordingly, justify the financial corrections applied in the final decision excluding from Community financing certain expenditure incurred by the Member State concerned under the EAGGF ( Portugal v Commission , cited in paragraph 47 above, paragraph 40).

60. Moreover, a failure to observe that condition laid down in Article 8(1) of Regulation No 1663/95 and Article 11 of Regulation No 885/2006 deprives of its substance the procedural guarantee accorded to Member States by the fifth subparagraph of Article 7(4) of Regulation No 1258/1999, which limits the period in respect of which expenditure can be refused financing by the EAGGF ( Spain v Commission , cited in paragraph 58 above, paragraph 29 and the case-law cited).

61. Article 8(1) of Regulation No 1663/95 and Article 11 of Regulation No 885/2006 must therefore be read in conjunction with the fifth subparagraph of Article 7(4) of Regulation No 1258/1999. According to those provisions, the Commission may not exclude expenditure effected more than 24 months prior to the Commission’s written communication of the results of those checks to the Member State concerned. It follows that the written communication required under the first subparagraph of Article 8(1) serves as a warning that expenditure effected during the period of 24 months preceding notification of that communication may be excluded from financing by the EAGGF and, accordingly, that that communication constitutes the reference point from which the period of 24 months thus prescribed is to be calculated ( Spain v Commission , cited in paragraph 58 above, paragraph 30).

62. Consequently, in order to perform its function as a warning, in particular in the light of the fifth subparagraph of Article 7(4) of Regulation No 1258/1999, the communication referred to in Article 8(1) of Regulation No 1663/95 and in Article 11 of Regulation No 885/2006 must first identify in a sufficiently precise manner all irregularities which the Member State concerned is alleged to have committed which, ultimately, formed the basis for the financial correction applied. Such a communication alone can ensure that full information is provided concerning the Commission’s reservations and can constitute the reference point for calculation of the period of 24 months laid down in the fifth subparagraph of Article 7(4) of Regulation No 1258/1999 and in Article 31 of Regulation No 1290/2005 ( Spain v Commission , cited in paragraph 58 above, paragraph 31).

63. Furthermore, where irregularities justifying the application of a financial correction persist after the date of the written communication of the results of the checks, the Commission is entitled and even obliged to take account of that situation when it determines the period to which the financial correction in question is to relate (Case C-157/00 Greece v Commission [2003] ECR I-153, paragraph 45).

64. The Court of Justice therefore considered, in Greece v Commission , cited in paragraph 63 above, that, although it was true that neither Article 8(1) of Regulation No 1663/95 nor Article 5(2)(c) of Regulation No 729/70 precluded the period to which a financial correction relates from extending beyond the date of the written communication of the results of the checks to the Member States, the fact nevertheless remained that those provisions did not explicitly authorise the Commission to take into account a period going beyond the date of that written communication of the results of the checks to the Member States and therefore did not provide a sufficient legal basis for applying a flat-rate correction. The Court considered, however, that that legal basis was provided by Article 5(2)(c) of Regulation No 729/70 and by Articles 2 and 3 of the same regulation, which obliged the Commission to refuse financing of expenditure improperly incurred, since those provisions allowed the Commission to charge to the EAGGF only interventions carried out in accordance with Community provisions, so that the Commission could legitimately apply the financial correction to a period extending beyond the date of the written communication ( Greece v Commission , cited in paragraph 63 above, paragraphs 43, 44 and 46).

65. It is necessary, first of all, to examine whether the letter of 5 December 2006 satisfies the requirements of Article 11 of Regulation No 885/2006, read in conjunction with the fifth subparagraph of Article 7(4) of Regulation No 1258/1999, and therefore constitutes a regular communication in accordance with those provisions. For that purpose, it must be verified that, in that letter, the Commission sufficiently identified the purpose and results of the investigation, namely, the deficiencies found which form the basis of the financial correction applied against Madeira for the marketing years 2004, 2005 and 2006 (financial years 2005, 2006 and 2007), and stated the corrective measures which were to be adopted in the future.

66. It should be pointed out that, by letter of 8 March 2005, the Commission informed the Portuguese authorities that an inspection visit concerning the aid scheme for specific measures concerning certain agricultural products for the Azores and Madeira would be made between 11 and 15 April 2005, focusing on the years 2003 and 2004, and would relate to monitoring procedures, including those established and those actually carried out.

67. In order to prepare for that inspection visit, the Commission asked the Portuguese authorities to send it beforehand certain information relating to those two years and to the measures which were the subject-matter of the inspection.

68. The results of that inspection visit were communicated to the Portuguese Republic by the first communication of 5 December 2006, pursuant to Article 11 of Regulation No 885/2006.

69. The Commission referred, in the annex to the first communication of 5 December 2006, entitled ‘Observations and recommendations’, under paragraph 1.1, ‘Area checks’, to the high rate of errors and the failure to increase the rate of checks during the year 2004 following that high amount of aid which was refused in whole or in part. The Commission stated that the introduction of the GIS combined with the lack of a land register and also the extremely uneven lie of the land and the fact that the plots were only partially planted had limited the effectiveness of the checks. It found that the inspectors relied only on the GIS and that there was no on-the-spot physical measuring to render the verifications of the plots accurate and reliable. It stated, by way of example, that, in 2004, area checks had been carried out by the Madeiran authorities on the basis of a sample representing at least 10% of the aid applications, in accordance with Article 58 of Regulation No 43/2003, and that the results of those checks had revealed a rate of error of 36% for the areas checked. On the basis of those findings, the Commission considered that the minimum rate of checks carried out by the Portuguese authorities was not sufficient to protect the interests of the EAGGF. Consequently, the Commission criticised the Portuguese authorities for failing to increase the controls during 2004, which constituted a deficiency in the monitoring system.

70. As regards the corrective measures to be taken in order to ensure future compliance with the Community rules, the Commission pointed out, in the first communication of 5 December 2006, that the Portuguese authorities were advised to make more frequent use of physical measuring when controlling areas, such as the GPS or measuring tape.

71. It follows that, as regards the year 2004, the first communication of 5 December 2006 identifies in a sufficiently precise manner all the irregularities which the Portuguese Republic is alleged to have committed which could form the basis for a financial correction.

72. As regards the year 2005, it must be stated that, as the Portuguese Republic rightly points out, the first communication of 5 Decemb er 2006 contains no result relating to checks carried out or even any reservation in that regard; moreover, the purpose of that communication was only to inform the Portuguese republic of the results of the checks carried out during the inspection visit made between 11 and 15 April 2005, which concerned only the years 2003 and 2004.

73. Admittedly, it is clear from the annex to the first communication of 5 December 2006 that the Commission requested that, ‘as regards the monitoring system set up for 2005, the Portuguese authorities [provide] a list of applicants indicating those subject to an on-the-spot check (a selection of check reports [was to] be made subsequently) and a summary showing, per product, the number of applicants, the number of applicants checked, the number of irregularities found, separating those for which aid was refused in part from those for which aid was refused in whole’. The Commission also added that ‘an indication of the areas involved would also be useful in order for the errors to be assessed in financial terms’.

74. However, it cannot reasonably be maintained, nor, moreover, does the Commission so claim, that that request for the transmission of information concerning the year 2005 may be regarded as identifying in a sufficiently precise manner the irregularities which the Portuguese Republic is alleged to have committed which formed the basis for the financial correction within the meaning, inter alia, of the judgment in Spain v Commission , cited in paragraph 58 above.

75. As regards the year 2006, the first communication of 5 December 2006 contains no observation or even a request for information.

76. It is apparent from the foregoing that, as regards the years 2005 and 2006 to which the objections of the Portuguese Republic relate and for which corrections were applied in the contested decision, the first communication of 5 December 2006 does not identify, within the meaning of the case-law referred to in paragraphs 54 to 60 above, the irregularities which the Member State is alleged to have committed.

77. The Commission points out, however, in its pleadings, that, in the formal communication of 27 October 2009, it clearly stated its intention to apply a financial correction by extrapolation and considered the amount of expenditure to be excluded. Accordingly, the Commission states that it extrapolated, on the basis of the control data for 2005 and 2006, the reference period of the first communication of 5 December 2006, since the control data for 2005 and 2006, communicated by the Portuguese Republic itself, did not differ from those for 2004 and were of the same scale. The Commission adds that the data for 2005 and 2006 even indicated a tendency to worsen, since the rate of errors had risen.

78. That argument cannot be upheld in the light of the case-law mentioned above.

79. Under Article 11 of Regulation No 885/2006, the first communication must, as a result of an inquiry, contain the results of the Commission’s verifications concerning expenditure which was not effected in compliance with Community rules by the Member State concerned and indicate the corrective measures needed to ensure future compliance with those rules. Furthermore, it is those results which constitute the basis of any correction and which must be communicated to the Member State as soon as possible in order that it may remedy the defects found without delay and, consequently, avoid fresh corrections in the future ( Portugal v Commission , cited in paragraph 47 above, paragraphs 29 and 32).

80. Moreover, it is apparent both from Article 8 of Regulation No 1663/95, as amended, and from Article 11 of Regulation No 885/2006 that, if the Member State fails to correct the irregularities found by the Commission, the Commission may exclude the expenditure affected by non-compliance with the Community rules until such time as the corrective measures it has imposed are actually implemented.

81. However, it must be stated that, in the present case, the results which constitute the basis of the correction were not communicated as soon as possible, since the results of the investigation were not communicated by the Commission until 5 December 2006, and the Portuguese authorities were thus prevented from implementing corrective measures relating to the marketing years 2005 and 2006, which had already ended.

82. It is true that, according to the case-law, in particular the judgment in Greece v Commission , cited in paragraph 63 above, paragraph 45, where irregularities justifying the application of a financial correction persist after the date of the written communication of the results of the checks, the Commission is obliged to take account of that situation when it determines the period to which the financial correction in question is to relate.

83. However, the Commission’s obligation to take account of a situation in which the irregularities justifying the application of a financial correction persist can no longer apply where, as in the present case, the written communication was made on a date at which it had become impossible for the Member State concerned to correct the irregularities found, since it is only from the moment that Member State was informed of that situation that it could still remedy it.

84. Any other interpretation would mean authorising the Commission to make a financial correction for a period prior to the date of the first communication of the verifications without the Member State having been informed beforehand and having been able to correct those irregularities.

85. It follows that the Commission’s obligation to make such financial corrections cannot extend to a period which was not covered by the inspection visit and which was prior to the date of the first communication of 5 December 2006, since the Member State, which was not informed of the irregularities found until after the end of the marketing years concerned, was unable to adopt any corrective measures in time.

86. Although it is true, as the Commission maintains, that it took as its basis the data communicated to it by the Portuguese Republic which, moreover, it has not disputed, it must nevertheless be stated that, at the date on which the first communication of 5 December 2006 was transmitted, the Portuguese authorities were no longer able to correct the deficiencies in order to comply in the future with EU rules, even though one of the objectives of that communication is specifically to enable the Member State to implement corrective measures in order to remedy the shortcomings found and even though, if it fails to implement such measures, the Commission may, without having to adduce further evidence, apply financial corrections in the future.

87. Moreover, it cannot be maintained, as the Commission maintains, that the extrapolation it effected is automatic and different from the monitoring operations, without affecting the warning function which forms an integral part of the nature of Article 8(1) of Regulation No 1663/95.

88. In that regard, it is apparent from the first communication of 5 December 2006 that the Commission criticised the Portuguese authorities for relying only on the GIS although, according to the Commission, they should have taken physical measurements in order to render the verifications of the plots accurate and reliable. It follows that that first communication includes the statement of measures for making the verifications accurate and reliable and thus for avoiding rates of irregularities as high as those found by the Portuguese authorities and communicated to the Commission. The implementation of such measures might have enabled the Portuguese Republic to respond to the concerns expressed by the Commission and thus to avoid the imposition of financial corrections in the future.

89. From that point of view, it should be pointed out that the warning function which forms an integral part of the nature of Article 8(1) of Regulation No 1663/95 was noted in Portugal v Commission , cited in paragraph 47 above. In that case, although the investigation related to the marketing years 2002 and 2003, the Court held, in paragraph 64 of the judgment, with regard to marketing year 2003, that the fact that the Commission, in Annex 1 to the letter sent to the Member State concerned pursuant to Article 8(1) of Regulation No 1663/95, as amended, mentions the marketing year 2003 was not sufficient to establish that that letter referred to irregularities concerning that marketing year.

90. The General Court therefore held, in paragraph 69 of the judgment in Portugal v Commission , paragraph 47 above, that, as there was no mention of its checks, the Member State had been unable to establish that the Commission’s findings were inaccurate or to correct any deficiencies in order to comply with Community rules in the future, so that it did not have the benefit of the procedural guarantee accorded to Member States. The Court therefore held, in paragraph 70 of that judgment, that, since there was no mention of the results of the Commission’s verifications concerning the marketing year 2003, its letter communicating the results of the verifications could not constitute the basis of any financial correction whatsoever, and, accordingly, be described as a first communication within the meaning of Article 8(1) of Regulation No 1663/95. The Court therefore concluded, in paragraph 71 of the judgment in Portugal v Commission , paragraph 47 above, that there had been an infringement of Article 7(4) of Regulation No 1258/1999 and Article 8(1) of Regulation No 1663/95.

91. Similarly, it should be pointed out that the Court of Justice, in Spain v Commission , paragraph 58 above, set aside the judgment of 12 November 2010 in Case T-113/08 Spain v Commission , not published in the ECR, on the ground that the General Court had considered that a letter from the Commission was a formal communication pursuant to Regulation No 1663/95, even though the complaint made therein against the Member State had been inadequately stated. The Court therefore held that the General Court failed to have regard for Article 8(1) of Regulation No 1663/95 and for the fifth subparagraph of Article 5(2)(c) of Regulation No 729/70 and the fifth subparagraph of Article 7(4) of Regulation No 1258/1999, since only a communication which identifies in a sufficiently precise manner all irregularities which the Member State concerned is alleged to have committed can be regarded as a communication within the terms of Article 8(1) of Regulation No 1663/95, which constitutes the reference point for calculation of the period of 24 months laid down in the fifth subparagraph of Article 5(2)(c) of Regulation No 729/70 and the fifth subparagraph of Article 7(4) of Regulation No 1258/1999 ( Spain v Commission , cited in paragraph 58 above, paragraph 34).

92. In the present case, although the first communication of 5 December 2006 identifies with sufficient precision the irregularities which the Portuguese Republic is alleged to have committed, on the basis of monitoring data for 2004, on the other hand, it must be stated that that same communication contains no observation concerning the years 2005 and 2006, even though, first, the nature of the irregularities found during those years is no different from that of the irregularities found in 2004, second, the Portuguese Republic does not contest the data for the years 2005 and 2006 which, furthermore, it transmitted itself to the Commission, and, third, those data reveal a worsening of the situation found by the Commission for the year 2004.

93. Therefore, the first communication of 5 December 2006 cannot be invoked in support of financial corrections concerning the aforementioned years 2005 and 2006, in respect of which that communication could not, in particular, enable the Member State concerned to correct, within the meaning of the abovementioned case-law, the irregularities found during the inspection visit which took place between 11 and 15 April 2005 and which related to the years 2003 and 2004.

94. It follows from the foregoing that the first plea in law must be accepted and, consequently, the contested decision annulled in that the Commission applied a financial correction in respect of the marketing years 2005 and 2006, that is to say, the financial years 2006 and 2007, in the amounts of EUR 239 045.63 and EUR 266 137.96 respectively.

95. It must therefore be stated that, owing to the annulment of the contested decision in so far as concerns the marketing years 2005 and 2006, the second, third and fourth pleas will be examined only in respect of marketing year 2004.

The second plea, alleging misinterpretation of recital 28 in the preamble to Regulation No 43/2003 and infringement of Article 7(4) of Regulation No 1258/1999

96. According to the Portuguese Republic, during the marketing years concerned, the national authorities increased the rate of control to a level significantly higher than the minimum statutory levels, even though Article 58 of Regulation No 43/2003 does not expressly call for increased checks. Accordingly, the checks related to samples which were three times the minimum statutory checks. First, the checks related to samples representing between 10 and 30% of the aid applications, second, for 40% of areas, the rate of errors led to a total or partial refusal of financing, third, the checks represented, in terms of area, rates of between 25% and over 50% and, fourth, the checks at issue were carried out before payment, so that aid was reduced and penalties applied. The Portuguese authorities gave priority to eligible areas, the increase in checks relating above all to the area eligible for aid, which was subject to a rate of between 25 and 50%, including 40%. The Portuguese Republic points out that, according to the case-law, the fact that a procedure is open to improvement does not in itself justify a financial correction. It was therefore for the Commission to show in what respect the degree of irregularity justified an increase in checks different from or higher than that decided by the national authorities, which the Commission did not do during the accounts clearance procedure.

97. The Portuguese Republic adds that the fact that the Commission states at the application stage that it took Article 58(1) of Regulation No 43/2003 as its basis for adopting the contested decision, even though it had never previously invoked that provision, constitutes an infringement of its rights of defence.

98. As regards the recovery of sums lost through irregularities, to which the Commission refers, first, the Portuguese Republic states that it is apparent from the documents in the case that the Portuguese authorities carried out checks before making payments, so that there was no need to effect recovery. Second, the Portuguese Republic criticises the Commission’s view that, henceforth, if the average rate of irregularities checked was 2%, the Member States are required to recover the amount corresponding to the average rate of the irregularities detected in the sample, that is to say, also 2%, from all the farmers eligible for aid. According to the Portuguese Republic, the rule under Article 8(1) of Regulation No 1258/1999 is the opposite and lays down only the obligation to recover the amounts lost owing to irregularities.

99. It should be pointed out that, according to settled case-law, the EAGGF finances only intervention undertaken in accordance with the Community rules within the framework of the common organisation of agricultural markets. In that regard, it is for the Commission to prove that an infringement of the rules on the common organisation of the agricultural markets has occurred. Accordingly, the Commission is obliged to give reasons for its decision finding an absence of, or defects in, inspection procedures operated by the Member State in question ( Greece v Commission , cited in paragraph 63 above, paragraph 15 and the case-law cited).

100. However, the Commission is not required to demonstrate exhaustively that the inspections carried out by the national authorities are insufficient, or that the data submitted by them are irregular, but to adduce evidence of serious and reasonable doubt on its part regarding those inspections or data ( Greece v Commission, cited in paragraph 63 above, paragraph 16 and the case-law cited).

101. This mitigation of the burden of proof on the Commission is explained by the fact that it is the Member State which is best placed to collect and verify the data required for the clearance of EAGGF accounts and, consequently, it is for that State to adduce the most detailed and comprehensive evidence that its inspections or figures are accurate and, if appropriate, that the Commission’s statements are incorrect ( Greece v Commission , cited in paragraph 63 above, paragraph 17 and the case-law cited).

102. The Member State concerned, for its part, cannot rebut the Commission’s findings by mere assertions which are not substantiated by evidence of a reliable and operational supervisory system. If it is not able to show that they are inaccurate, the Commission’s findings can give rise to serious doubts as to the existence of an adequate and effective series of supervisory measures and inspection procedures ( Greece v Commission , paragraph 63 above, paragraph 18 and the case-law cited).

103. It should also be pointed out that Article 58(1) of Regulation No 43/2003 provides, inter alia, first, that administrative checks shall be exhaustive and shall include cross-checks wherever appropriate with, inter alia, data from the integrated administration and control system and, second, that, based on a risk analysis, the national authorities shall perform on-the-spot checks by sampling at least 10% of aid applications. Recital 28 in the preamble to Regulation No 43/2003 states that where significant irregularities are found, the level of the on-the-spot checks should be increased during the current and the following year in order to attain an acceptable level of assurance that the aid applications concerned are correct.

104. In the first place, as regards the alleged infringement of the rights of defence owing to the fact that the Commission states for the first time before the General Court that it took Article 58 of Regulation No 43/2003 as its basis, it need only be pointed out, first, that, inter alia, that regulation is mentioned in the citations of the summary report of 19 July 2010, second, that Article 58 of that regulation is expressly referred to in that report with regard to risk analysis and, finally, that recitals 26 to 28 in the preamble to Regulation No 43/2003 do not, on their own, constitute the basis of the Commission’s analysis.

105. Indeed, it is stated in paragraph 1.1.1 of the summary report, after the finding that the data submitted by the Portuguese authorities show that the minimum rate of checks applied (10%) cannot protect the EAGGF against the risk of overpayment, that, ‘in that regard, it is particularly relevant to [refer to] the preamble to the regulation’. It was in that context that the Commission then referred to recitals 26 to 28 of Regulation No 43/2003.

106. From that wording, it cannot reasonably be maintained that the Commission intended to rely only on those recitals to the exclusion of the provisions of that regulation themselves.

107. It follows that no complaint relating to the alleged infringement of the rights of defence can be upheld against the Commission.

108. In the second place, as the Commission rightly points out, Article 58(1) of Regulation No 43/2003, read in the light of recital 28 in the preamble to that regulation, requires the national authorities to carry out on-the-spot checks on a sample of at least 10% of aid applications. However, where the risk analysis which the national authorities must carry out reveals that the rate of checks is not enough to prevent irregularities, they must increase those checks, since there is a high risk that the EAGGF will suffer losses.

109. This interpretation is, furthermore confirmed by Article 8 of Regulation No 1258/1999, which the Court has already held requires the Member States to take the measures necessary to satisfy themselves that the transactions financed by the EAGGF are actually carried out and are executed correctly, to prevent and deal with irregularities and to recover sums lost as a result of irregularities or negligence, even if the specific Community act does not expressly provide for the adoption of particular supervisory measures (Case C-373/99 Greece v Commission , not published in the ECR, paragraph 9; judgment of 30 September 2009 in Case T-55/07 Netherlands v Commission , not published in the ECR, paragraph 62). The Court stated that it follows from that provision, considered in the light of the duty of faithful cooperation with the Commission laid down by Article 4 TEU, with particular regard to the correct utilisation of Union resources, that Member States are required to set up comprehensive administrative checks and on-the-spot inspections, thus guaranteeing the proper observance of the substantive and formal conditions for the grant of the premiums in question ( Greece v Commission , cited in paragraph 63 above, paragraph 11 and the case-law cited).

110. Moreover, as the Commission rightly points out, where the rate of errors shows a tendency to rise, the inspecting authority is bound to react by increasing the level of supervision. Accordingly, although, for a sample of 10%, the rate of errors may go up to 2%, where, as in the present case, for the marketing year 2004 an error rate of 36% for checked areas is found, the level of supervision, and therefore the control sample, should have been increased as a consequence, since there was a risk of greater financial losses for the EAGGF, which was clearly not the situation in the present case, notwithstanding the fact that, for certain crops, the rate of checks of aid applications was considerably higher than 10% of aid applications.

111. The fact remains that, faced with such a risk of high losses for the EAGGF, clearly identified by the results of the checks carried out by the Portuguese authorities, those authorities were required to react and their failure to do so amounted to a failure to adopt the checking measures implicitly needed to ensure correct compliance with the substantive and procedural conditions for the grant of the premiums at issue.

112. In that regard, it should be pointed out that, according to the case-law, if no comprehensive system exists or if the system introduced is inefficient to the extent that it gives rise to doubts as to compliance with the conditions imposed for the grant of the premiums concerned, the Commission is entitled to disallow certain expenditure incurred by the Member State (judgment of 4 September 2009 in Case T-368/05 Austria v Commission , not published in the ECR, paragraph 84 and the case-law cited).

113. The Portuguese authorities are therefore wrong to claim that, by carrying out checks at a level considerably higher than the minimum statutory levels, they complied with the legislation in force, and thus did not fail to fulfil their obligations under Regulation No 43/2003, because they did not adopt the checking measures implicitly needed to ensure correct compliance with the substantive and procedural conditions for the grant of the premiums at issue.

114. Moreover, contrary to what the Portuguese Republic claims, it should be pointed out that, where irregularities are found, for example, on 40% of areas in a sample corresponding to 10% of the aid applications, that same rate of irregularities must, except in circumstances connected with that checked sample, which is for the Member State concerned to establish, necessarily be found in the whole of the statistical universe.

115. Therefore, it cannot reasonably be maintained, as is clear from the pleadings of the Portuguese Republic, that the refusal of financing relating only to the part of the checked sample is sufficient, within the meaning of the case-law referred to in paragraphs 109 and 112 above, to ensure that irregular operations are not financed by the EAGGF. 

116. Unless information is given by the national authorities pointing to specific features of the sample whose result cannot be repeated at the level of the whole of the statistical universe, which the Portuguese Republic has not even raised, it must be stated that there is no reason to sow doubt as to the existence of a gap between the checked sample and the whole of the statistical universe.

117. Finally, with regard to the argument put forward by the Portuguese Republic that the national authorities carried out checks before making payments, so that there was no need to effect recovery, it should be pointed out that making that deduction in payment only as regards the sample whose check has given a negative result cannot be regarded as complying with the legislation, since, as has been pointed out in paragraph 115 above, the refusal of financing relating only to that part of the sample whose check has given a negative result is bound to be insufficient in accordance with the case-law mentioned in paragraphs 109 and 112 above.

118. It is apparent from all the foregoing that the second plea must be rejected.

The third plea, alleging infringement of Article 7(4) of Regulation No 1258/1999

119. According to the Portuguese Republic, by extrapolating the percentage of the irregularities found by the Portuguese authorities on the areas checked in Madeira to all the applications made, the Commission infringed Article 7(4) of Regulation No 1258/1999. Accordingly, the Commission disregarded its own guidelines in document No VI/5330/97. The Portuguese Republic points out that financial corrections by extrapolation can be applied by the Commission only if it has itself carried out an evaluation on the basis of the errors in the individual files. In respect of the years 2004, 2005 and 2006, the Commission did not carry out an analysis of any file, because it took as its basis for imposing the flat-rate correction by extrapolation, not the analysis of the results of the individual files compiled during the inspection visit, but the rate of irregularities detected by the Portuguese authorities in the sample inspected, a rate which the Commission then applied to all the applications submitted in Madeira. That practice of using a correction by extrapolation without verifying any individual file has no legal basis in Document No VI/5330/97. The provisions of Annex 4 to Document No VI/5330/97 cannot serve as a basis for a decision to impose a financial correction, if the paying body refused, in part or in whole, to make payments where irregularities had been detected.

120. In that regard, it should be pointed out that Document No VI/5330/97 provides, in Annex 2, that ‘financial corrections shall be applied where the Commission finds that expenditure has not been effected in compliance with Community rules’. That document also provides that ‘unless the irregular payment had already been detected by National control bodies and the appropriate remedial and recovery measures taken, the Commission must refuse its financing by the Community budget’. If the irregular expenditure may be determined, and therefore the amount of the financial losses suffered by the Community, it is provided in document No VI/5330/97 that the sum refused is calculated on the basis of an extrapolation of the results of an examination of a representative sample of files to all the files from which a sample has been taken, but which is limited to the administrative area for which the same deficiency may reasonably be expected to occur.

121. It is also stated that, when the actual level of irregular expenditure cannot be determined, flat-rate corrections are applied (see, to that effect, Austria v Commission , cited in paragraph 112 above, paragraph 183 and the case-law cited).

122. Document No VI/5330/97 states that flat-rate corrections may be envisaged when the information resulting from the enquiry does not permit the auditor to evaluate the loss by an extrapolation of determined losses, by statistical means, or by reference to other verifiable data. That document adds that flat-rate corrections are not appropriate when the Member States’ own control services detect such failures, under the condition mentioned in Annex 4. If the Member State does not recover any amount incorrectly paid or found to be irregular, the clearance of accounts department cannot refrain from laying down financial correction measures.

123. It should be pointed out that the Commission took as its basis, in respect of the marketing year 2004, which alone is at issue in this plea, its own verifications and considered that the rate of irregularities found in the sample should be extended to the whole of the statistical universe.

124. It must be stated that, since the information resulting from the enquiry had permitted the auditor to evaluate the loss by statistical means or by reference to verifiable data, the Commission was right to consider that flat-rate corrections were not appropriate within the meaning of Document No VI/5330/97.

125. The Portuguese Republic claims, however, in that regard, that the Commission could not take the results of the controls of the national authorities as a basis for applying adjustments, since they had drawn consequences from the irregularities which they themselves had found.

126. Thus, it states that it refused, in part or in whole, to make payments in all cases of irregularities which the paying body had detected. It considers that no financial correction could be decided in the present case, since the paying body had drawn all the necessary consequences from the irregularities which it had found by penalising in whole or in part all the irregular applications detected.

127. The Portuguese Republic’s argument cannot be accepted.

128. If an irregularity is found, refusal to make payments only in respect of applications which have already been found to be irregular cannot be regarded as having remedied the finding of a deficiency and so to ensure that the EAGGF finances only applications which comply with the EU legislation (see, to that effect, Case C-413/92 Germany v Commission [1994] ECR I-3781, paragraphs 11 to 13).

129. Therefore, the Portuguese authorities should have taken into consideration the rate of errors found as regards the control sample and applied it to the whole of the given statistical universe, thus making it possible to assess the loss suffered by the EAGGF.

130. It follows that, by refusing payment only in respect of applications which had already been found to be irregular, the Portuguese authorities did not draw all the appropriate consequences from the irregularities which they had found.

131. Moreover, it should be pointed out that, according to the case-law, although it is for the Commission to prove that Community rules have been infringed, once it has established such an infringement it is for the Member State to demonstrate, if appropriate, that the Commission made an error as to the financial consequences to be attached to that infringement (Case C-130/99 Spain v Commission [2002] ECR I-3005, paragraph 90, and Austria v Commission , paragraph 112 above, paragraph 181).

132. Indeed, according to the case-law, the management of EAGGF finances is principally in the hands of the national administrative authorities responsible for ensuring that the Community rules are strictly observed and is based on mutual trust between the national authorities and the Community authorities. Only the Member State is in a position to know and determine precisely the information necessary for drawing up EAGGF accounts since the Commission is not close enough to obtain the information it needs from the economic operators ( Austria v Commission , cited in paragraph 112 above, paragraph 182 and the case-law cited).

133. It is therefore for the Member State to adduce the most detailed and comprehensive evidence that its inspections or figures are accurate in order to establish that the Commission’s doubts were unfounded ( Austria v Commission , cited in paragraph 112 above, paragraph 201).

134. The Portuguese Republic has not adduced any evidence to show that the Commission had committed an error with regard to the financial consequences of the irregularities found.

135. It is apparent from the foregoing that the third plea must be dismissed.

The fourth plea, alleging infringement of the principles of equal treatment and proportionality

136. The Portuguese Republic considers that, by precluding the application of Document No VI/5330/97, which seeks to provide uniform guidelines for making financial corrections, the Commission infringed the principles of equal treatment and proportionality.

137. As regards, first, the infringement of the principle of equal treatment, the Portuguese Republic states that, if the Commission had complied with the guidelines which it had undertaken to follow, it would have opted for flat-rate corrections. In the present case, the Portuguese Republic considers that the failure to increase control rates for the current year and for the following years in the face of a high number of irregularities could be compared with a key control which was not carried out with sufficient thoroughness, so that a 5% flat-rate correction should have been applied, as the Commission had imposed in connection with inquiry AA/2006/10. The Portuguese Republic therefore considers that, by treating the inquiry which culminated in the contested decision differently from inquiry AA/2006/10, the Commission infringed the principle of equal treatment, because two identical situations are treated differently.

138. In that regard, first, it should be pointed out that each case must in principle be assessed individually to determine whether, as regards operations financed by the EAGGF, the Member State in question acted in accordance with the requirements of Community law and, if it failed to do so, to what extent (Case C-242/97 Belgium v Commission [2000] ECR I-3421, paragraph 129, and Case C-418/06 P Belgium v Commission [2008] ECR I-3047, paragraph 91).

139. This does not mean that a Member State is not entitled to plead infringement of the principle of equal treatment. However, it may do so only if the cases it cites are at least comparable as regards all the elements which characterise them, including, in particular, the period during which the expenditure was incurred, the sectors concerned and the nature of the irregularities complained of (Case C-242/97 Belgium v Commission , cited in paragraph 138 above, paragraph 130, and Case C-418/06 P Belgium v Commission , cited in paragraph 138 above, paragraph 92).

140. It should be borne in mind, secondly, that the Court has consistently held that prohibited discrimination can arise where comparable situations are treated differently, unless such treatment is objectively justified ( Belgium v Commission , cited in paragraph 138 above, paragraph 93 and the case-law cited, and judgment of 12 July 2011 in Case T-197/09 Slovenia v Commission , not published in the ECR, paragraph 89).

141. It must be stated that the deficiencies found in inquiry AA/2006/10 are not comparable to those in the present case. Thus, it is apparent from inquiry AA/2006/10 that, during that inquiry, the Commission called in question the on-the-spot check. It considered that the fact that the on-screen measurements had taken priority over the measurements taken in the field had led to incorrect decisions, inter alia as regards the inference drawn from invalid criteria, which had detracted from the quality of the on-the-spot checks and which had culminated in an infringement of the provisions of the applicable legislation.

142. In contrast, in the present case, the Commission condemned, in the summary report, principally, the fact that the Portuguese authorities relied on the GIS, the failure to increase the rate of control in the face of a high number of irregularities and the fact that the number of irregularities did not fall between 2004 and 2007.

143. It follows that, since the two situations are not comparable, it cannot be alleged that the Commission infringed the principle of equal treatment.

144. As regards, second, infringement of the principle of proportionality, the Portuguese Republic maintains that, since the average area of a farm in Madeira is very small, an error in the measurement of a plot, insignificant in terms of area, results in a particularly high rate of errors. Therefore, if the guidelines in Document No VI/5330/97 had been followed, the correction would have been 5%, whereas, in this case, the corrections vary between 44.32% and 90.48%. The Commission opted for extrapolation, the most unfavourable solution for the Portuguese Republic, without offering the slightest justification as to why that choice was appropriate for the objectives it seeks to attain. The extrapolation of the rate of irregularities in the sample selected on the basis of a risk analysis infringes the principle of proportionality, since that rate is bound to be higher than the rate of irregularities of all the applications taken together. The Portuguese Republic adds that it is not apparent from the verifications carried out by the national authorities that they did not select the sample on the basis of a risk analysis.

145. It is important to point out that the principle of proportionality, enshrined in Article 5 TEU, requires that measures adopted by Community institutions are not to exceed what is appropriate and necessary to attain the objective pursued (Case 15/83 Denkavit Nederland [1984] ECR 2171, paragraph 25; judgment of 30 April 2009 in Case T-281/06 Spain v Commission , not published in the ECR, paragraph 64, and Netherlands v Commission , paragraph 109 above, paragraph 117).

146. It has been established above that the guidelines in Document No VI/5330/97 are complied with, since they recommend that, where the information in the procedure permits the auditor to evaluate the loss by extrapolation, the correction must be made according to that method. As that was the case of the data from the Portuguese authorities resulting from the procedure, the Commission could, without infringing those guidelines, apply the financial corrections by extrapolation.

147. Moreover, where, instead of disallowing all the expenditure affected by the infringement, the Commission has endeavoured to establish rules under which irregularities are treated differently, depending on the extent of the shortcomings in the checks and the degree of risk to the EAGGF, it is for the Member State to show that those criteria are arbitrary and unfair (Case C-242/96 Italy v Commission [1998] ECR I-5863, paragraph 75, and Case C-28/94 Netherlands v Commission [1999] ECR I-1973, paragraph 56).

148. In that regard, first, it is apparent from the table of the data supplied in the official communication of 27 October 2009, that the Commission distinguished between the amount of the penalties according to the years, the types of crop and the rate of errors in the on-the-spot checks. In addition, it took account of the fact that there was no indication which enabled it to presume the same deficiencies concerning the Azores and therefore applied the financial correction only to the expenditure declared by the region of Madeira. Therefore, it cannot be alleged that it applied, in accordance with the guidelines contained in Document No IV/5330/97, a disproportionate correction.

149. Second, it is apparent from settled case-law that the EAGGF finances only intervention undertaken in accordance with the Community rules within the framework of the common organisation of agricultural markets (Case C-278/98 Netherlands v Commission [2001] ECR I-1501, paragraph 38, and judgment of 14 February 2008 in Case T-266/04 Spain v Commission , not published in the ECR, paragraph 97). In cases where Community rules authorise payment of aid only on condition that certain formalities relating to proof or supervision are observed, aid paid in disregard of that condition may not therefore be charged to the EAGGF (Case C-197/90 Ital y v Commission [1992] ECR I-1, paragraph 38, and Spai n v Commission , cited in paragraph 149 above, paragraph 116).

150. In the present case, it is therefore appropriate to reject the Portuguese Republic’s argument that, since the average area of a farm in Madeira is very small, an error of measurement, insignificant in terms of area, results in a particularly high rate of errors, so that corrections made by extrapolation are also high. Since that fact does not preclude the risk of harm to the EAGGF, it follows that the Commission was entitled to exclude from Community financing the expenditure corresponding to the POSEI measures in Madeira.

151. Moreover, it is also appropriate to reject the Portuguese Republic’s argument that the extrapolation of the rate of irregularities in the sample selected on the basis of a risk analysis infringes the principle of proportionality. In the present case, the Portuguese Republic has not adduced any evidence of the method of determining the sample and the factors taken into consideration for the risk analysis.

152. It follows that there is therefore no infringement of the principle of proportionality, so that the fourth plea must be dismissed.

153. It is apparent from all the foregoing that the contested decision must be annulled in that the Commission applied to the Portuguese Republic a financial correction relating to the POSEI measure for the financial years 2006 and 2007 and that the action must be dismissed as to the remainder.

Costs

154. Pursuant to Article 87(3) of the Rules of Procedure, the General Court may order that the costs be shared or that each party bear its own costs where each party succeeds on some and fails on other heads. In the circumstances of this case, each party is to bear its own costs.

Operative part

On those grounds,

THE GENERAL COURT (Eighth Chamber)

hereby:

1. Annuls Commission Decision 2010/668/EU of 4 November 2010 excluding from European Union financing certain expenditure incurred by the Member States under the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF), under the European Agricultural Guarantee Fund (EAGF) and under the European Agricultural Fund for Rural Development (EAFRD) (OJ 2010 L 288, p. 24), in that it applies to the Portuguese Republic a financial correction to the POSEI measure for the financial years 2006 and 2007.

2. Dismisses the action as to the remainder.

3. Orders each party to bear its own costs.