VES-13-18 CO:R:IT:C 111545 JBW
Deputy Assistant Regional Commissioner
Commercial Operations
c/o Regional Commissioner
New Orleans, LA 70130-2341
RE: Vessel Repairs; Inspection; Discount; S/S LOUISIANA; Entry
No. C20-0012281-5.
Dear Sir:
This letter is in response to your memorandum of February
14, 1991, which forwards for our review the application for
relief filed in conjunction with the above-referenced vessel
repair entry.
FACTS:
The record reflects that the subject vessel, the S/S
LOUISIANA, arrived at the port of Lake Charles, Louisiana, on
August 8, 1990. Vessel repair entry, number C20-0012281-5, was
filed on the same day as arrival. The entry indicates that the
vessel underwent repairs at the Compagnie Marseillaise de
Rparations (CMR) in Marseille, France, from June 27, 1990, to
July 22, 1990. The work included repairs, that are acknowledged
to be subject to duty in the application, and work claimed to be
free from duty as modifications, inspections, and drydocking
costs.
ISSUES:
(1) Whether certain costs incurred as a result of an
inspection of the vessel's starboard boiler top coil air heater
are dutiable if such costs are attributable both to repairs and
to a reactivation survey carried out by the American Bureau of
Shipping.
(2) Whether a credit applied against the cost of paint used
in a repair results in a diminution of the dutiable value of the
item.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides in
pertinent part for payment of duty in the amount of fifty percent
ad valorem on the cost of foreign repairs to vessels documented
under the laws of the United States to engage in foreign or
coastwise trade, or vessels intended to engage in such trade.
The applicant seeks relief from duty for the costs of an
inspection of the vessel's starboard boiler top coil air heater.
CMR Invoice Item 104. The record shows that nine leaks were
found and repaired. Id.; ABS Reactivation Survey, dated 20 July
1990. Customs has held that inspections not resulting in repairs
are not dutiable. Headquarters Ruling Letter 110395, dated
September 7, 1989; see American Viking Corp. v. United States, 37
Cust. Ct. 237, 247, C.D. 1830 (1956). Where periodic surveys are
undertaken to meet the specific requirements of, for example, a
classification society or insurance carrier, the cost of the
surveys is not dutiable even when dutiable repairs are effected
as a result thereof. Headquarters Ruling Letter 110368, dated
July 26, 1989. However, if the survey is to ascertain the extent
of damage sustained or whether repairs are necessary, then the
costs are dutiable as part of the repairs that are accomplished.
C.I.E. 429/61; C.S.D. 79-2, 13 Cust. B. & Dec. 993 (1979); C.S.D.
79-277, 13 Cust. B. & Dec. 1395, 1396 (1979). In the liquidation
process, Customs should look beyond the mere labels of
"continuous" or "ongoing" before deciding whether the item is
dutiable. If an inspection or a survey is conducted as a part of
a maintenance and repair program labelled "continuous" or
"ongoing," the cost of such survey is dutiable if it is in fact
repair related.
We find the claim of the applicant that the inspection costs
of the starboard boiler top coil air heater is non-dutiable as an
inspection to be problematic. The simple fact that some
classification society is involved in a drydocking survey does
not render all inspection costs non-dutiable. The mere labeling
of work "inspection" is ambiguous, for the documentation provided
does not demonstrate whether the cost for the inspection was, for
example, to ascertain the extent of the known deterioration of
the part, which is dutiable, or whether the cost of the
inspection was exclusively related to examination by the
classification society. All repairs involve some form of
inspection. In this case, the disparity between the cost for
inspection and the cost for repairs suggests that some of the so-
called "inspection" costs were related to these repairs. While
the cost of the ABS survey is not dutiable, if properly
segregated, the inspection to determine the required repairs is
dutiable. Absent such a breakdown, we find the entire cost for
inspection to be dutiable.
The applicant also identifies as the dutiable value for
paint used in repairs the cost of the paint minus a three percent
discount, which was calculated based on the date of payment,
minus a forty-three percent credit. Hempel Invoice 500070, dated
July 24, 1990. The Customs Service recognizes that only actual
expenses borne by the vessel should be taken into consideration
when liquidating vessel repair entries; we have thus permitted
the deduction of "discounts," which are properly documented, from
the invoiced cost of parts or materials. Headquarters Ruling
Letter 111230, dated November 8, 1990; C.I.E. 227/63, dated
December 20, 1962.
Duty, therefore, should not be assessed against the value of
the three percent discount contained in the Hempel Invoice.
However, the reason or purpose for the forty-three percent
"credit" is unclear. If the credit is in the nature of a
discount--that is, a simple reduction in the cost to the
purchaser--then clearly duty should not be assessed. If the
credit represents the payment of part of the cost by other means,
then duty should be assessed against the amount of the credit.
Absent an explanation of what the credit represents, we find the
amount of the credit to be dutiable.
HOLDINGS:
(1) The cost of an inspection is dutiable if the inspection
is performed to ascertain whether repairs are required. In
cases where inspection costs are attributable both to repairs and
to a survey carried out by the American Bureau of Shipping, the
cost of the inspection to determine whether repairs are required
is dutiable, whereas the cost of the ABS survey is not subject to
duty. Absent a breakdown that apportions the inspection costs,
we find the entire cost for the inspection to be dutiable.
(2) The credit appearing in the Hempel invoice is not
identifiable as a non-dutiable discount. We find the amount of
the credit to be dutiable.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch