VES-13-18 CO:R:IT:C 111884 JBW
Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831
RE: Vessel Repair; Modification; Repair; Segregation of Costs;
Inspection; Warranty; Scavenger Air Spaces; 19 U.S.C. 1466;
M/V PRESIDENT POLK; Entry No. C27-0054168-6.
Dear Sir:
This letter is in response to your memorandum dated August
21, 1991, which forwards for our review the application for
relief filed in conjunction with the above-referenced vessel
repair entry.
FACTS:
The vessel PRESIDENT POLK arrived at the port of San Pedro,
California, on May 25, 1991, and filed a timely vessel repair
entry. The entry indicates the vessel had foreign shipyard work
while in Japan, Taiwan, , and Hong Kong. The entry also
indicates that during the course of its foreign voyage, the
vessel called in Singapore where it underwent extensive repair
and modification procedures. We are requested to consider the
dutiable character of numerous items and to address the general
of whether a cost category listed as "overhead" and represented
as a flat percentage of each enumerated shipyard operation may be
considered as non-dutiable.
ISSUES:
(1) Whether work claimed to have been performed pursuant to
warranty is subject to duty in this case.
(2) Whether certain work performed to the vessel in Jurong
Shipyard resulted in modifications to the vessel and is therefore
not subject to duty under 19 U.S.C. 1466.
(3) Whether the underwater survey is a non-dutiable
inspection under 19 U.S.C. 1466.
(4) Whether certain foreign shipyard procedures and costs,
including overhead charges, are considered subject to duty.
(5) Whether removing carbon and oil deposits from diesel
engine air scavenger spaces constitutes a nondutiable cleaning or
a dutiable maintenance operation under 19 U.S.C. 1466.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466(a), provides in
pertinent part for payment of duty in the amount of 50 percent ad
valorem on the cost of foreign repairs to vessels documented
under the laws of the United States to engage in the foreign or
coastwise trade, or vessels intended to be employed in such
trade.
In the case of Sea-Land Service, Inc. v. United States, 683
F. Supp. 1404 (CIT 1988), the court addressed whether repair work
performed on a newly constructed vessel subsequent to its
delivery to the owner might be considered to be part of the new
construction contract. Simply put, the court considered whether
"completion of construction" is a viable concept so as to render
the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven.
The court found completion of new construction to be a valid
concept, subject to specific conditions, which are:
1. "All work done and equipment added [must be] pursuant
to the original specifications of the contract for the
construction of the vessel ...."
2. "This basic standard is limited to work and equipment
provided within a reasonable period of time after
delivery of the vessel."
The contract for construction of the vessel under
consideration in that case contained clauses guaranteeing for
twelve (12) months any area of the vessel for which the builder
accepted responsibility under the contract and specifications,
conditioned upon written notification from the owner of any
covered defect within the agreed upon 12-month period.
In reviewing the warranty case on remand from the court,
Customs had the opportunity to review the contract, the
specifications, and a so-called "guarantee notebook." This
document consisted of numerous guarantee items, some generic in
nature and some specific, and represented the written
notification of defects from the owner to the builder as required
by the contract. In that case, we found that the court-ordered
criteria had been satisfied and that the "reasonable period of
time" for the warranty period was the one-year period specified
in the contract. We have since held likewise in similar cases,
and have adopted the one-year limit as the bench mark for
honoring new construction warranties which otherwise qualify.
In the present case, the applicant seeks relief for claimed
warranty work performed on the #1 and #2 Hatch Longitudinal
Coaming Terminations (Jurong Invoice Item 3.3-14). These
operations were performed between April 25, 1991, and May 1,
1991. In a letter dated December 21, 1990, American President
Lines stated to Customs that the PRESIDENT POLK was delivered on
July 17, 1988. Notwithstanding this statement, the first
notation in the record that the vessel was experiencing problems
in this area was on November 22, 1989. Letter from American
Presidents Line to Bremer Vulkan AG, dated November 22, 1989.
These dates exceed the one-year limit described above.
Moreover, the applicant submits no acknowledgement by the vessel
builder that such repairs actually fell within the scope of the
warranty. Absent such evidence, the applicant's warranty claims
are denied.
Over the course of years, the identification of modification
processes has evolved from judicial and administrative precedent.
In considering whether an operation has resulted in a
modification which is not subject to duty, various elements may
be considered. In all cases, modification costs must be fully
segregated from other charges, since mixed repair/modification
charges are assessed duty.
1. Whether there is a permanent incorporation into the
hull or superstructure of a vessel (see United States
v. Admiral Oriental Line et al., T.D. 44359 (1930),
either in a structural sense or as demonstrated by the
means of attachment so as to be indicative of the
intent to be permanently incorporated. This element
should not be given undue weight in view of the fact
that vessel components must be welded or otherwise
"permanently attached" to the ship as a result of
constant pitching and rolling. In addition, some
items, the cost of which is clearly dutiable, interact
with other vessel components resulting in the need,
possibly for that purpose alone, for a fixed and stable
juxtaposition of vessel parts. It follows that a
"permanent attachment" takes place that does not
necessarily involve a modification to the hull and
fittings.
2. Whether in all likelihood, an item under consideration
would remain aboard a vessel during an extended layup.
3. Whether, if not a first time installation, an item
under consideration replaces a current part, fitting or
structure which is not in good working order.
4. Whether an item under consideration provides an
improvement or enhancement in operation or efficiency
of the vessel.
After reviewing the evidence regarding the specific items
submitted for our consideration, we find the following:
Jurong Shipyard Item 3.3-2: Shell Plate and Internal
Stiffeners Frames 296 to 308:
Stiffeners were installed to correct a design defect in
the C-10 class vessels. The invoice shows no repairs
were made to this ship in these areas. The cost of
this item is not subject to duty.
Jurong Shipyard Item 3.3-10: Hatch Cover and Coamings:
This invoice item shows that modifications were made to
the hatch covers of the vessel. The invoice,
subsection (h), shows that repairs were made to correct
cracks in the hatch covers and provides a separate cost
for these repairs. The repairs made under subsection
(h) are therefore subject to duty. Likewise, costs
appearing under subsection (a), which relate to
removal and inspection of the hatch covers, are subject
to duty. Otherwise, the work performed under this
invoice item represents a new design feature and is
considered a modification. The cost of this other work
is not subject to duty.
Jurong Shipyard Item 3.3-14: #1 and #2 Hatch Longitudinal
Coaming Terminations:
We denied earlier in this letter the applicant's claim
that this item was performed pursuant to warranty. The
invoice indicates that repairs to correct fractures
were made as part of the claimed modification. Because
these costs were not segregated, the entire cost of the
item is subject to duty.
Jurong Shipyard Item 3.3-19: Removal of Bow Thruster Bars:
This item involved the removal of the strainer bars on
the port and starboard side shell. No repairs were
made. The item represents an alteration in the design
of the vessel that may be characterized as an
improvement. The cost of this item is not subject to
duty.
Jurong Shipyard Item 3.3-20: Bottom Longitudinals at Major
Frames 3, 6, and 9:
The invoice indicates that repairs were made as part of
the claimed modification. Because these costs are not
segregated, the entire cost of the item is subject to
duty.
Jurong Shipyard Item 3.7-6: Engine Room Exhaust Fan Outlet
Louvers:
The invoice shows that engine room louvers were
installed. The record shows that the louvers were a
new design feature and did not replace previously
installed items. This work constitutes a modification
that is not subject to duty.
Jurong Shipyard Item 5.7-12: Anchor Bottom Plate:
The work under this item was performed to correct sea
exposure of the anchors and anchor stowage. This work
constitutes a new design feature that is not repair
related. The costs are therefore not subject to duty.
Jurong Shipyard Item 5.3-8: Main Engine L.T. Cooling
Isolation Valve:
The invoice shows that an isolation valve was
installed. This valve did not replace an existing part
and represents a new design feature. This work
constitutes a modification that is not subject to duty.
Jurong Shipyard Item 5.7-1: Main Engine Air Cooler Water
Line:
The invoice indicates that main engine air cooler pipes
were removed and reconfigured. This work constitutes
an improvement to the vessel and is not subject to
duty.
The Jurong Shipyard invoice indicates that an underwater
survey was performed. The Customs Service has held that where a
test is performed to ascertain the extent of damage sustained or
whether repairs are deemed 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). However, 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). The invoice description relating to the
survey in question indicates that no repairs were made. The
costs are therefore not subject to duty.
The applicant also seeks relief for the replacement of sea
valve plugs (Jurong Invoice Item 3.3-21). The applicant claims
that these plugs were replaced to meet United States Coast Guard
and American Bureau of Shipping requirements for five year dry
docking surveys. The Customs Service has held that where
periodic surveys are undertaken to meet the specific requirements
of a governmental entity, 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. In a recent case, we
emphasized that this interpretation exempts from duty only the
cost of a required scheduled inspection by a qualifying entity.
Headquarters Ruling Letter 111328, dated August 7, 1991.
Further, this office has held that repairs made in preparation of
a required survey are not exempt from duty. Id. The invoice
description and the description provided in the record suggest
that the plugs were replaced as part of an ongoing maintenance
program in preparation for a survey. The cost of the plugs is
subject to duty under 19 U.S.C. 1466.
The entry in question is accompanied by company-prepared
work sheets which include a column marked as "Duty Free Overhead
@ 8$ Per Man Hour" [sic]. It is reported that Customs will be
receiving eight other entries which can be expected to include
this cost category and we are asked to rule upon the dutiable
status of such "overhead" charges.
Customs has had occasion to consider the dutiability of so-
called "overhead" charges (see Customs Ruling 111170, February
21, 1991). In that ruling, we cited a published Treasury
Decision of long standing (T.D. 55005(3), December 21, 1959),
wherein it was determined that:
Taxes paid on emoluments received by third parties
for services rendered...and premiums paid on workmen's
compensation insurance, are not charges or fees within
the contemplation of the decision of the Customs Court,
International Navigation Company v. United States, 38
USCR 5, CD 1836, and are therefore subject to duty as
components of the cost of repairs under [section 1466].
"Emoluments" as used in the cited decision would include
all wages, taxes, accounting fees, office space charges,
inventory or mark-up costs, purchasing costs, and management
fees. Certainly, general and unspecified "overhead" charges such
as are included in the entry under consideration are considered
dutiable.
The applicant seeks relief for the cleaning of certain main
engine air scavenger spaces. The scavenging spaces of a diesel
engine are steel chambers that are permanently attached to the
cylinders of the engine. The scavenging spaces serve two
functions. First, the scavenging spaces receive the discharge
from the turbo-chargers and deliver the charged air to each
cylinder via reed valves and intake ports. Second, air from the
piston underside is pumped into the scavenging space via reed
valves to supplement turbo-charger-delivered air. This air
enters the cylinders via inlet ports uncovered when the piston
gets to the bottom end of its stroke and serves to "scavenge" the
burnt gasses out of the cylinder. This process cleans the
cylinders of spent energy and provides a clean air discharge for
the next fuel injection. As a result of this process, some
gasses containing unburnt carbon may be left and deposited in the
scavenging spaces.
These carbon deposits and other oily deposits in the
scavenger spaces may result in fire or explosion. They also
reduce the efficient operation of the engine. Diesel engine
maintenance manuals therefore require periodic cleaning of the
scavenger spaces to permit the safe and efficient operation of
the vessel. The maintenance of a scavenger space involves
removing access plates and scraping, wire brushing, and wiping
the inside of the space. This operation is labor intensive and
would take a single worker up to two working days to clean a
single cylinder.
In analyzing the dutiability of foreign vessel work, the
Customs Service has consistently held that cleaning is not
dutiable unless it is performed as part of, in preparation for,
or in conjunction with dutiable repairs or is an integral part of
the overall maintenance of the vessel. E.g., Headquarters Ruling
Letter 110841, dated May 29, 1990 (and cases cited therein). The
Customs Service considers work performed to restore a part to
good condition following deterioration or decay to be maintenance
operations within the meaning of the term repair as used in the
vessel repair statute. See generally, Headquarters Ruling
Letter 106543, dated February 27, 1984; C.I.E. 142/61, dated
February 10, 1961.
The dutiability of maintenance operations has undergone
considerable judicial scrutiny. The United States Court of
Customs and Patent Appeals, in ruling that the term repair as
used in the vessel repair statute includes "maintenance
painting," gave seminal recognition to the dutiability of
maintenance operations. E. E. Kelly & Co. v. United States, 55
Treas. Dec. 596, T.D. 43322 (C.C.P.A. 1929). The process of
chipping, scaling, cleaning, and wire brushing to remove rust and
corrosion that results in the restoration of a deteriorated item
in preparation for painting has also been held to be dutiable
maintenance. States Steamship Co. v. United States, 60 Treas.
Dec. 30, T.D. 45001 (Cust. Ct. 1931).
Most recently, the United States Customs Court examined
whether the scraping and cleaning of Rose Boxes constituted
dutiable repairs. Northern Steamship Company v. United States,
54 Cust. Ct. 92, C.D. 1735 (1965). Rose Boxes are parts fitted
at the ends of the bilge suction to prevent the suction pipes
from being obstructed by debris. In arriving at its decision,
the court focused on whether the cleaning operation was simply
the removal of dirt and foreign matter from the boxes or whether
it resulted in the restoration of the part to good condition
after deterioration or decay. Id. at 98. The court determined
that the cleaning did not result in the restoration of the boxes
to good condition following deterioration and consequently held
that the work was not subject to vessel repair duties. Id. at
99. The Customs Service has ruled that the regular cleaning of
filters in most instances does not result in liability for duty.
See Headquarters Ruling Letter 107323, dated May 21, 1985.
From these authorities, we determine that the cost of
cleaning the air scavenger spaces is subject to duty under 19
U.S.C. 1466. The term deterioration is defined to mean
degeneration, which in turn denotes declined function from a
former or original state. See The American Heritage Dictionary
of the English Language 376, 387 (2d ed. 1985). The principal
function of the air scavenger spaces is to either deliver turbo-
charged air to the cylinders or receive spent gasses from the
cylinders. The collection of carbon and other oily deposits
poses a fire or explosion hazard and results in a diminished
engine function. The removal of the carbon deposits through
scraping, wire brushing, and wiping results in a restoration of
the scavenger spaces to good condition following a decline in
function of the scavenger spaces. Such an operation can be
distinguished from cleaning a Rose Box or other filter, for the
collection of debris by these parts results not in a diminution
of function, but alternatively demonstrates the proper function
of the part.
HOLDING:
Following a thorough review of the evidence submitted as
well as analysis of the applicable law and precedents, we have
determined that the Application for Review should be allowed in
part and denied in part as set forth in the Law and Analysis
portion of this ruling.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch