VES-13-18-CO:R:IT:C 112861 GOB
Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90831
RE: Vessel repair; 19 U.S.C. 1466; Petition; ULTRASEA, V-1
Dear Sir:
This is in response to your memorandum dated August 17, 1993,
which forwarded the petition submitted on behalf of Sealift, Inc.
("petitioner").
FACTS:
The ULTRASEA, an American-flag vessel, underwent foreign
shipyard operations at the Keppel Shipyards while in Singapore.
After the completion of the work, the vessel arrived in the United
States at Portland, Oregon on November 6, 1992. Vessel Repair
Entry No. 718-0000421-1 was filed on November 12, 1992.
By letter dated April 20, 1993 (112604), we issued our ruling
with respect to the petitioner's application for relief, which was
granted in part and denied in part.
Petitioner's Claims
The petitioner states that the nature of the transportation
charges should be clear from the invoice. It has submitted a
statement from the shipyard that transportation charges as itemized
on the invoice were for costs associated with the movement of
materials between the vessel and various locations in the shipyard.
The petitioner claims that overhead expenses are not dutiable
because they are not part of the actual repair work. It cites
several Customs rulings in support of this claim.
The petitioner contends that all of the work done on the
forepeak tank, the portable water tank, and the aft peak tank was
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directly related to modifications of the tanks. It has submitted
a description of the modifications to the tanks, as well as
drawings and material lists.
The petitioner asserts that relief was denied with respect to
several items such as life rafts, an economizer, and main condenser
because the cleaning was allegedly performed "in conjunction with"
dutiable repairs. It states that the cleaning had nothing to do
with any repairs.
ISSUES:
(1) Whether transportation costs are dutiable pursuant to 19
U.S.C. 1466.
(2) Whether overhead costs are dutiable pursuant to 19 U.S.C.
1466.
(3) Whether the costs associated with the work performed on the
forepeak tank, the portable fresh water tank, and the aft peak tank
are dutiable pursuant to 19 U.S.C. 1466.
(4) Whether certain cleaning costs are dutiable pursuant to 19
U.S.C. 1466.
LAW AND ANALYSIS:
19 U.S.C. 1466 provides for the payment of duty at a rate 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 be employed in such
trade.
Issue (1)
We have consistently held that transportation costs which are
broken-out or segregated from repair costs are nondutiable.
Accordingly, all transportation costs which are broken-out or
segregated on the invoices are nondutiable. See CIE 941/60 and
1970/60 and C.D. 1836. Similarly, cranage costs are also
nondutiable if they are broken-out or segregated on the invoices.
Issue (2)
It is Customs position that overhead relating to repair work
is dutiable as part of the cost of the repair. Overhead is part
of the shipyard's cost of doing business. The total shipyard cost
of each repair item is dutiable; that total cost includes overhead.
Customs does not wish to see overhead broken-out or segregated
as a separate item. Customs believes that overhead
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should be included within the cost of the work performed, whether
that work be a dutiable repair or a nondutiable modification. As
stated supra, the total shipyard cost of each repair item is
dutiable; that cost includes overhead.
In support of its position that the overhead is nondutiable,
the petitioner has cited two previous rulings, Ruling 109308 dated
May 26, 1988 and Ruling 108953 dated January 7, 1988.
In Ruling 112214 dated September 16, 1992, Customs stated as
follows with respect to the overhead issue:
Upon further review of this matter, we are of the opinion
that our interpretation of T.D. 55005(3) as set forth in ruling
111170 and discussed above is correct. Accordingly, rulings
108953 and 109308 are hereby modified to hold that the costs
of "overhead" and/or "administrative" charges as described therein
are dutiable in their entirety in the absence of an apportionment
of such expense between dutiable and non-dutiable work.
The two rulings cited by the petitioner, Ruling 109308 and
Ruling 108953, are not, and were not at the time they were issued,
accurately reflective of Customs position. These two rulings were
effectively overruled by Ruling 112214.
In the subject case, the petitioner's claim for relief on this
issue is granted with respect to any overhead charges which are
associated with nondutiable charges and which are clearly reflected
as such on the pertinent invoices. The petition is denied with
respect to all other overhead charges.
Issue (3)
In its application of the vessel repair statute, the Customs
Service has held that modifications, alterations, or additions to
the hull and fittings of a vessel are not subject to vessel repair
duties. The identification of work constituting modifications vis-
a-vis work constituting repairs has evolved from judicial and
administrative precedent. In considering whether an operation has
resulted in a nondutiable modification, the following factors have
been considered:
1. Whether there is a permanent incorporation into
the hull or superstructure of a vessel (See
United States v. Admiral Oriental Line, 18
C.C.P.A. 137 (1930)), either in a structural sense or
as demonstrated by means of attachment so as to be
indicative of the intent to be permanently
incorporated.
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2. Whether in all likelihood an item under
consideration would remain aboard a vessel during
an extended lay-up.
3. Whether, if not a first time installation, an
item under consideration constitutes a new design
feature and does not merely replace a part,
fitting, or structure that is performing a similar
function.
4. Whether an item under consideration provides an
improvement or enhancement in operation or
efficiency of the vessel.
After a consideration of the evidence of record, we find that
the costs of the work associated with the portable fresh water tank
and the forepeak tank are nondutiable modifications.
The costs of the work associated with the aft peak tank are
dutiable as repairs because the record indicates that this work
was a repair. The pertinent invoice states in part:
Aft Peak Tank Repair
Modified/strengthened fwd area of aft peak tank iwo
[sic] portable water tank including framing, floors,
port and stbd forward and aft girders and bracketing at
shell and underdeck framing. (Aft peak structure
affected by weight of portable water tank resulting in
damage to frame floors)
This work falls within the common definition and concept of
a repair. Webster's Third New International Dictionary, 1961,
defines the noun "repair" as the "restoration to a state of
soundness, efficiency or health." The same source defines the verb
"repair" as "to restore by replacing a part or putting together
what is torn or broken...to restore to a sound or healthy state."
As indicated in Issue (2) supra, the overhead charges
associated with the portable fresh water tank and the forepeak tank
are nondutiable. The overhead charges associated with the aft peak
tank repair are dutiable.
Issue (4)
The petitioner has asked for relief with respect to cleaning
costs related to life rafts (item 343), the economizer (item 507),
and the main condenser (item 510).
Customs position with respect to cleaning is that cleaning
pursuant to a nondutiable modification or other nondutiable work
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is nondutiable. Cleaning before or during dutiable repairs is
dutiable. It is also Customs position that post-repair cleaning
is dutiable; however, because the post-repair cleaning issue is
currently pending before the U.S. Court of Appeals for the Federal
Circuit ("CAFC") in Texaco Marine Services, Inc. and Texaco
Refining and Marketing, Inc. v. United States, Customs has withheld
ruling on that specific issue until the CAFC decides that case.
The life raft costs (item 343) are dutiable as repairs and
equipment. The evidence does not reflect that any of these costs
were incurred pursuant to an "ABS/USCG periodic inspection", as
stated in the petition. The invoice merely states: "INFLATABLE
LIFERAFTS - USCG INSPECTION." The cleaning costs associated with
the life raft costs are dutiable.
We find that the cleaning costs associated with the main
condenser (item 510) are dutiable. The item for main condenser
testing, which is part of item 510 and which includes the supply
and renewal of zinc anodes, is indicative of a repair.
Accordingly, we find that the cleaning on the same item number is
dutiable. We further note that the extensive nature of the
cleaning on this item is indicative of a dutiable maintenance item.
We affirm our previous finding that the costs associated with
the "Renewal of Economizer Elements" (item 507) are dutiable
because they are repair items. The cleaning associated with this
item is dutiable.
We note that there is no specific indication in the record
that the cleaning discussed supra is post-repair cleaning. In the
absence of evidence that the cleaning is post-repair cleaning, we
will not withhold ruling on that item.
HOLDING:
As detailed supra, the petition is granted in part and denied
in part.
Sincerely,
Arthur P. Schifflin
Chief
Carrier Rulings Branch