The German authorities considered garlic capsules as a medicinal product not a foodstuff, and were concerned about the risks connected with taking garlic in general, and therefore refused to market them as a supplement.
But the Court has now ruled against this move.
"This judgement is historic," said secretary general of the European Botanical Forum (EBF) Patrick Coppens.
"It lays down very specific criteria that Member States must respect when making the distinction between food use and medicinal use of botanicals.
"The judgement will have far-reaching consequences for Member States that consider specific botanicals as medicinal by function."
According to the European Advisory Service, placing botanical products on the European market can be difficult for businesses because of a lack of harmonisation and differing rules between member states.
Speaking previously on a podcast, Coppens had said that the principle of mutual recognition is often ignored by member states.
"There are no European harmonised rules, there are national rules that apply and some member states have very specific rules," he said.
"There are some products that may be considered as a medicinal product in one member state and may be a food supplement in another."
The European Commission took action against Germany in 2005, saying the sale of product should not be restricted.
In every other member state they are regarded and regulated as food products.
By Germany abstaining, an obstacle to intra-Community trade in foodstuffs was created.
In the judgement, the court decided the capsules could not be called a medicinal product.
It said that while presentation in capsule form is an indicator towards classification amongst medicinal products by presentation, this can not be the sole indicator, nor is the capsule form exclusive to medicinal products.
Regarding the concept of a medicinal product by function, the Court stated that garlic capsules do not contain any substance other than natural garlic and have no additional effects, either positive or negative, compared to those derived from the consumption of garlic in its natural state.
In contrast, a medicinal product must have the function of preventing or treating disease.
Beneficial effects for health in general are not sufficient.
Manfred Ruthsatz, chairman of the EBF, said: "Beneficial effects for health in general, such as those of garlic, are not sufficient to classify food supplements as medicinal products."
The Court recalled that it is for the Member States to decide on their intended level of protection of health, while taking into account the requirements of the free movement of goods.
In exercising their discretion, each country must comply with the principle of proportionality.
In this case, the requirement for authorisation could not be justified by the arguments put forward by Germany, which related to garlic in general, not the particular product.
Last year Germany announced that cinnamon dietary supplements in Germany carrying health claims to reduce blood sugar and help control type-2 diabetes should be classed as medicinal products.
This arose over concerns about differing coumarin levels in some products, said to cause liver damage and inflammation when higher doses are taken over a longer period by sensitive individuals, and has spurred the institutes into action.