VES-13-18 CO:R:IT:C 112418 GFM
Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831
RE: Vessel Repair; Modification; Repair; Petition;
Segregation of Costs; Inspection; Warranty; Settlement;
Air Scavenger Spaces; Overhead; Supplemental Petition;
19 U.S.C. 1466; 19 C.F.R. 4.14(d)(2)(i);
M/V PRESIDENT POLK; Entry No. C27-0054168-6.
Dear Sir:
This letter is in response to your memorandum dated
May 20, 1993, which forwards for our review the "Supplemental
Petition for Review" submitted by the petitioner in conjunction
with the above-referenced vessel repair entry. We note at the
outset that concerning the filing of a Supplemental Petition for
Review, it was the position of Customs, as articulated in Customs
Ruling Letters 110027 of September 29, 1989, and 109671 of
September 18, 1988, that a bifurcated procedure existed for final
administrative appeals of vessel repair decisions, depending upon
whether a particular appeal involved classification issues
(expenses incurred were not for repairs or equipment purchases
under section 1466(a)), or whether remission issues were the
subject of appeal (those matters arising under section 1466(d)).
It was our position that classification issues were subject to
Protest, and that the proper filing for the appeal of remission
issues was a Supplemental Petition for Review. The Court in
Penrod Drilling Company v. United States, 727 F. Supp. 1463
(1989), ended distinctions between the issues of classification
and remission so far as the question of appeal format is
concerned by holding that all matters arising under section 1466
may be protested. In the present matter therefore, as
liquidation of the entry had not taken place prior to the
submission of additional evidence by petitioner's counsel, such
additional evidence is to be considered part of the original
petition and not a "Supplemental Petition for Review." We note
further that had liquidation occurred prior to such a submission,
such evidence would not be considered part of a "Supplemental
Petition for Review," but rather, part of a Protest.
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 underwent foreign shipyard
work while in Japan, Taiwan, and Hong Kong. The entry also
indicates that during the course of its foreign voyage, the
vessel anchored at Singapore where it underwent extensive repair
and modification procedures. In Headquarters Ruling Letter
111884, we considered the dutiability of numerous vessel repair
items. We are now requested to reconsider the dutiability of
some of those items.
ISSUE:
Whether certain foreign shipyard operations performed aboard
the subject vessel are subject to duty 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.
ITEM 3.1-1 LIGHTING...............................$ 1,370.00
This item involves segregated charges for lighting which
were held dutiable at the application stage. As this item
represents segregated charges for lighting only, the item should
be considered non-dutiable.
ITEM 3.2-6 CARGO HOLD CLEANING....................$ 34,400.00
This item involves cleaning of the cargo holds which
petitioner asserts was not related to any repairs. With regard
to cleaning operations, whether the cleaning was performed
before, during or after the dutiable repair work is irrelevant as
to the question of dutiability. Customs has long held that
cleaning performed in preparation of, or in conjunction with
dutiable repairs is dutiable. Customs Memorandum 109789 GV (11-
4-88). Contrary to petitioner's contention, our review of the
invoice regarding this item shows that major repairs were in fact
carried out to the vessel's #1,#2, and #7 cargo holds. Thus, as
a nexus between the repairs and the cleaning does exist, the cost
of this item ($ 34,400) is dutiable.
ITEM 3.2-5 HATCH COAMINGS.........................$ 12,630.00
ITEM 3.3-10 HATCH COVERS
Sub-item (a)...................................$ 39,600.00
Sub-item (b)...................................$ 28,900.00
Sub-item (c)...................................$ 33,880.00
Sub-item (d)...................................$ 4,290.00
Sub-item (e)...................................$ 29,580.00
Sub-item (f)...................................$ 25,160.00
Sub-item (g)...................................$ 3,140.00
Sub-item (h)...................................$ 55,980.00
Sub-item (i)...................................$ 15,360.00
Sub-item (j)...................................$ 14,460.00
Sub-item (k)...................................$ 2,112.00
These items involve charges for operations performed to
several of the vessel's hatch covers and coamings. Petitioner
contends that the malfunction of these items was due to a design
defect which is present in four other similarly constructed
vessels delivered under the same contract.
The PRESIDENT POLK was delivered on July 17, 1988 under
warranty from the builder HDW. Submitted with the petition is a
copy of a letter dated February 10, 1989, in which the petitioner
(APL) notifies the shipbuilder (HDW) of said defects and details
specific instances of breakdown. As the petitioner thus notified
the vessel builder of these alleged defects within the
established one-year period, petitioner contends that these items
should be considered non-dutiable repairs made under warranty.
Regarding items 3.3-10 and 3.2-5, the above referenced APL
letter of February 10, 1989, indicates that inspections were
performed which revealed certain failures and that more
inspections were scheduled to take place. In the absence of
evidence to the contrary, we place faith in petitioner's claim
that additional inspections prior to the April/May 1991 repairs
were indeed carried out and that as the record contains no
evidence to suggest otherwise, the work performed in items
3-3.10 and 3.2-5 resulted from failures revealed in those
inspections.
With regard to warranties, the case of Sea-Land Service,
Inc. v. United States, 683 F. Supp. 1404 (CIT 1988), 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. In that case, 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.
However, mere discovery and timely notice of a warranty
claim will not in and of itself, entitle an item to duty
remission. For duty remission to lie, Customs must be satisfied
that the warranty claim has been accepted by the vessel builder
or insurer. In the present case, according to APL letter # 5230-
RFS/BV, dated November 22, 1989, HDW's subcontractor, BV,
disclaimed liability for the items considered here arguing that
such damages were caused by heavy weather. In paragraph 7, page
4, of the petition, the petitioner states that APL and HDW
"recently reached a finalized agreement on these claims wherein
HDW has agreed to pay APL for hatch cover costs under warranty."
Further, the petition states that: "APL has also filed claims
with BV under warranty for these hatch cover/coaming repairs on
the basis of the HDW settlements. They anticipate a similar
resolution with BV."
The petition now before us contains no evidence regarding
either the recently finalized agreement between HDW and APL or
the claims submitted to BV. Consequently, unless and until
evidence is presented to show that the vessel builder or insurer
will extend coverage under warranty to the operations in
question, we have no recourse but to consider them dutiable as
repairs.
Sub-item (a):
We note that sub-item (a) involves the lifting ashore and
onboard of hatch covers which included arranging the necessary
lifters and cranes to load and unload the hatch covers which
petitioner claims are non-dutiable transportation costs.
According to C.I.E. 1325/58, charges for transportation of parts
and materials between a vessel and a workshop are not dutiable if
itemized separately. Moreover, it is the position of the Customs
Service that "transportation" does not include operations
relative to preparing the item for shipping. Thus, labor for
such services as removing a part from its housing or mounting, or
disconnecting an item, etc., does not constitute transportation
and is thus, dutiable. Headquarters Ruling Letter 112211. With
respect to item 3.3-10(a), the invoice contains consolidated
transportation charges and includes charges for services which
may not be included in transportation costs. Accordingly, the
entire cost of this sub-item ($ 39,600.00) is dutiable.
Sub-items (b), (c), (d), (f), (g), (h), (j) and (k):
Each of these items is considered a dutiable incident of
repair of the hatch covers and coamings for reasons set forth
above. Thus, the entire combined cost of these sub-items
($ 167,922.00) is fully dutiable.
Sub-item (e):
Pursuant to the Jurong Shipyard Limited letter of June 17,
1992, which contains a cost segregation for item 3.3-10, sub-
item (e) contains a segregated cost of $ 28,242.00 for staging.
As such costs have previously been considered non-dutiable, only
the remaining portion of that charge ($ 1338.00) is dutiable.
Sub-item (i):
Pursuant to the Jurong Shipyard Limited letter of June 17,
1992, which contains a cost segregation for item 3.3-10, sub-
item (i) contains a segregated cost of $ 2,112.00 for staging.
As such costs have previously been considered non-dutiable, only
the remaining portion of that charge ($ 13,248.00) is dutiable.
ITEM 3.3-14 HATCH #1 & #2..........................$ 1,700.00
This item involves the welding of fractures on the #1 and #2
longitudinal hatch coamings. Contrary to petitioner's
contention, this was not "primarily a modification." According
to evidence submitted, these operations remedied an existing
fracture. They are thus considered repairs. Moreover, as
inclusion of this item under warranty has yet to be established,
it is not part of the warranty repairs. Accordingly, the cost of
this item ($ 1,700.00) is fully dutiable.
ITEM 3.3-20 BOTTOM LONG. FRAMES 3, 6, and 9........$ 10,775.00
This item involves the fabrication, fitting and welding of
brackets on the longitudinal frames in the APT void spaces "as
per issued repair." According to the evidence submitted, these
operations remedied an existing fracture. They are thus
considered repairs. Moreover, as inclusion of this item under
warranty has yet to be established, it is not part of the
warranty repairs. Accordingly, the cost of this item
($ 10,775.00) is fully dutiable.
ITEM 998-4 PORT/STBD TRANSFORMER...................$ 4,726.00
This item involves cleaning of the transformer panels and
surrounding area. As this item does not seem to be associated
with any repair element, its cost ($ 4,726.00) is non-dutiable.
ITEM 5.4-10 SUPPLY FAN TRANSPORTATION..............$ 1,056.00
ITEM 5.4-13 EXHAUST FAN TRANSPORTATION.............$ 950.00
These items represent charges for transporting said fans
from the vessel to the workshop. As the items represent
segregated charges for transportation only, the cost of these
items is non-dutiable.
OVERHEAD............................................$ 150,560.00
Petitioner has submitted a cost breakdown for general
services performed at the shipyard which are said to represent
non-productive overhead charges. The burden of demonstrating the
underlying justification for such charges and their relationship
to specific repair operations has not been met. The charges
shown are attributable to the operation of the shipbuilding
facility in general. Consequently, the cost of the item
($ 150,560.00) is fully dutiable.
ITEM 6 (CF 226) SCAVENGER AIR SPACES................$ 22,760.00
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. The court determined that the
removal of dirt and foreign matter from the boxes 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 petitioner cites this line of judicial and
administrative decisions and contends that these decisions
establish a position of the Customs Service with regard to the
dutiability of cleaning air scavenger spaces. We do not dispute
that this line of decisions generally establishes the position of
the Customs Service on the non-dutiability of cleaning operations
unrelated to repairs or the dutiability of maintenance
operations. However, the precise issue presented is whether the
cleaning of air scavenger spaces may be characterized as simple
cleaning or as maintenance, not whether cleaning or maintenance
operations are dutiable or non-dutiable.
The petitioner's conclusion that the cleaning of air
scavenger spaces is a "simple" cleaning and is a fortiori not
subject to duty based on the decisions cited is untenable. The
petitioner attempts to characterize the cleaning of air scavenger
spaces as "simple" cleaning needed only for inspection of the
engine valves. This characterization fails, however, to include
the threat of fire or explosion posed by the failure to properly
maintain the scavenger spaces. It further fails to note the
decline in efficiency of the engines that results from the
collection of the carbon and oil deposits in the air scavenger
spaces. As stated in our previous rulings, the collection of
carbon and oil deposits results in a deterioration--as manifested
in the safety and efficiency problems--of the air scavenger
spaces that may only be corrected by cleaning the air scavenger
spaces. See generally Headquarters Ruling Letter 111700, dated
November 19, 1991. We therefore reaffirm our position that
cleaning air scavenger spaces is a maintenance operation that is
subject to duty under 19 U.S.C. 1466.
The petitioner contends that the Customs Service did not
publish its "surprise change of position" as required by the
Administrative Procedure Act and the Customs Regulations. The
Customs Regulations require the publication in the Federal
Register with an opportunity for public comment of a ruling that
has the effect of changing a practice that results in a higher
rate of duty. 19 C.F.R. 177.10(c)(1) (1992). The Customs
Service first addressed the issue of cleaning air scavenger
spaces in Headquarters Ruling Letter 110911, dated December 3,
1990. The petitioner has failed to cite a ruling or to
demonstrate otherwise that the Customs Service had in fact
established a position on the dutiability under 19 U.S.C. 1466
of the cleaning of air scavenger spaces prior to Headquarters
Ruling Letter 110911. Moreover, as shown in the previous
paragraph, we do not believe that the petitioner has demonstrated
that the holding in Headquarters Ruling Letter 110911 deviates
from existing judicial decisions or results in a reversal or
modification of any of the existing administrative rulings. We
submit that the reasoning and conclusion of that letter and
subsequent rulings on the issue are consistent with the precedent
identified in those ruling letters and by the petitioner. Thus,
publication of a change of practice was not required.
Finally, the petitioner contends that the Customs Service
has not held the cleaning of air scavenger spaces to be dutiable
since 1982. Headquarters Ruling Letter 110911 was issued in
response to an application for relief forwarded by the New York
Vessel Repair Liquidation Unit (VRLU) following which we learned
that from 1982 to 1990 the San Francisco VRLU had not been
assessing duty whereas the two other regional VRLU's were.
Absent a ruling letter or a published statement of position, we
hold that the petitioner cannot rely on determinations made by
the San Francisco VRLU to establish a position of the Customs
Service. See Superior Wire v. United States, 7 Fed. Cir. (T) 43,
45-46, 867 F.2d. 1409, 1412-13 (1989).
As a result of the foregoing, the removal of carbon and oil
deposits from the main engine scavenger spaces is a maintenance
operation the cost of which is subject to duty under 19 U.S.C.
1466. Accordingly, the cost of this item ($ 22,760.00) is fully
dutiable.
HOLDING:
After thorough review of the evidence presented, and as
detailed in the Law and Analysis portion of this ruling, the
petition for relief is granted in part and denied in part.
Sincerely,
Stuart P. Seidel
Director, International
Trade Compliance Division