VES-13-18-CO:R:IT:C 112900 GOB
Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90831
RE: Vessel Repair; 19 U.S.C. 1466; Protest; M.V. PRESIDENT F.D.
ROOSEVELT, V-69; Entry No. C27-0061042-4; Overhead
Dear Sir:
This is in response to your memorandum dated September 13,
1993, which forwarded the protest submitted by American President
Lines, Ltd. ("protestant") seeking reliquidation of the above-
referenced entry.
FACTS:
The vessel PRESIDENT F.D. ROOSEVELT (the "vessel") arrived at
the port of Los Angeles, California on October 28, 1991. A vessel
repair entry was filed on October 29, 1991. While in the Far East,
the vessel had been placed in drydock for the purpose of certain
repairs and U.S. Coast Guard and American Bureau of Shipping
inspections.
Application Ruling
By Ruling 112222 dated May 27, 1992, Customs determined that
the application for relief in this matter should be allowed in part
and denied in part. That ruling stated:
The largest single claim involves the so-called overhead
expenses. A letter from the foreign repair facility
indicates that $13.00 of every $25.00 charged as the hourly
labor rate is for non-productive overhead expenses. This
represents 52 percent of the foreign labor cost. We find that
there is no justification for allowing this claim and hold
these charges to be dutiable under the previously-stated
precedent.
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Petition Ruling
By Ruling 112439 dated March 16, 1993, Customs determined that
the petition for relief in this matter should be granted in part
and denied in part. With respect to the overhead issue, that
ruling stated:
Nothing has been submitted which justifies the blanket
granting of over half of all labor charges. Reduced to
its essence, we find that the petitioner has failed to sustain
its burden of demonstrating the underlying justification for such
charges and their relationship to specific repair operations. The
charges are found to be attributable to the general operating
expenses of the shipyard, and are fully dutiable.
Protestant's Claims
The protest at issue is limited to the issue of the
dutiability of "non-productive administrative overhead." The
protestant contends that "work or costs not incorporated in the
vessel is not repair and, accordingly, is not dutiable." In
support of its claim, the protestant cites Ruling 108953 dated
January 7, 1988, Ruling 109308 dated May 26, 1988, and Treasury
Decision 39443, 43 T.D. 99 (1923). Additionally, the protestant
has performed a "Billing Rate Analysis", which constructs a billing
rate which includes the following three elements: direct labor
cost, overhead, and margin and profit. After some analysis and
input from pertinent parties, the protestant uses a rate of $2.50
"per payable man-hour" for "non-productive administrative
overhead."
ISSUE:
Whether overhead 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.
In Ruling 112861 dated October 19, 1993, Customs considered
the issue of the dutiability of overhead. In that ruling, we
stated:
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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 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 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. [End of
excerpt from ruling 112861.]
Thus, as stated in Ruling 112861, Ruling 109308 and Ruling
108953 were effectively overruled by Ruling 112214, which was not
cited by the protestant in the subject case, nor was it cited by
the petitioning party in its petition in the case involving Ruling
112861.
As we stated in Ruling 112861, supra, it is Customs position
that overhead relating to repair work is dutiable as part of the
cost of the repair, i.e., the total cost or expense of the repair
is dutiable. In contrast, overhead relating to a nondutiable item
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such as a modification is nondutiable, i.e., the total cost or
expense of a nondutiable item is nondutiable. While Customs does
not wish to see overhead broken-out or segregated as a separate
item, our position on the dutiability of overhead, as stated supra,
holds whether or not overhead is a separate item.
Our position herein is consistent with numerous rulings issued
in recent years, e.g., Ruling 112861 and Ruling 112214, both cited
supra. See also Ruling 111170 dated February 21, 1991, which was
cited in Ruling 112222 (the ruling on the application for this
vessel repair entry), and subsequent rulings which cite Ruling
111170.
The protestant has cited T.D. 39443, which states in part:
These rulings are hereby modified so as to exclude from the
"expenses of repairs made in a foreign country" (1) any
additional compensation that may be paid members of the
regular crew of a vessel for repair work as well as their
regular wages when so engaged, and (2) the cost of materials
of American manufacture utilized in repair work which are
taken from the sea stores or ship's stores of a vessel. It
is held, therefore, that the words "expenses of repairs made
in a foreign country" as used in section 3114 of the
Revised Statutes, as amended by said section 1466, apply only
to expenditures made for foreign materials or for foreign
labor employed in making repairs.
The protestant cited only the second sentence of that part of
T.D. 39443 which is excerpted supra. The first sentence of T.D.
39443, excerpted supra, indicates that overhead or an overhead-
related item was not at issue in that decision.
Customs position in this ruling and in the rulings cited supra
is not a change from T.D. 39443. It is Customs position that the
total cost or expense of a foreign repair is dutiable. That total
cost includes overhead attributable to the repair. Overhead is
part of the shipyard's cost of doing business. In many cases in
various businesses, overhead expense incurred by the vendor is
recouped by including a provision for it in other costs, such as
the labor cost.
HOLDING:
The protest is granted only with respect to any overhead which
is related to nondutiable items; that overhead must be included in
the cost or expense of the nondutiable items or clearly reflected
as related to such nondutiable items on the pertinent invoices.
The protest is denied with respect to all other overhead.
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In accordance with Section 3A(11)(b) of Customs Directive 099
3550-065, dated August 4, 1993, Subject: Revised Protest Directive,
this decision should be mailed by your office to the protestant no
later than 60 days from the date of this letter. Any reliquidation
of the entry in accordance with the decision must be accomplished
prior to mailing of the decision. Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to
make the decision available to Customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette Subscription
Service, Lexis, the Freedom of Information Act and other public
access channels.
Sincerely,
Harvey B. Fox
Director, Office of
Regulations and Rulings