VES-13-18-RR:IT:EC 113752 LLB
Chief, Liquidation Section
U. S. Customs Service
P. O. Box 2450
San Francisco, California 94126
RE: Vessel Repair; Application for relief; M/V PRESIDENT
JACKSON, Voyage 79; Entry No. 110-6461898-3; Modifications;
Inspection; Staging; Cleaning; Survey; Maintenance; 19 C.F.R.
4.14(d); 19 U.S.C. 1466
Dear Sir:
This letter is in response to your memorandum dated October
29, 1996, which forwarded for our review an application for
relief from duties relating to the above-referenced vessel repair
entry. Our ruling follows.
FACTS:
The vessel PRESIDENT JACKSON, a United States-flag vessel
owned and operated by American President Lines (APL) of Oakland,
California, arrived at the port of Seattle, Washington, on May
23, 1996. According to the vessel repair entry and other
documents in the file, the vessel underwent certain work in
Taiwan, Hong Kong, Japan, and South Korea.
The vessel operator has submitted an Application for Relief
identifying certain items as non-dutiable modification work,
certain elements as covered under subsection (h) of the vessel
repair statute, and claiming that certain other items are
non-dutiable as consisting of staging, required inspection, or
cleaning. You request that we review fifty enumerated items in
the entry and provide you with our determination as to the
dutiability of those items.
ISSUE:
Whether the work described in the Law and Analysis portion
of this ruling is dutiable under the vessel repair statute (19
U.S.C. 1466).
LAW AND ANALYSIS:
Section 466(a), Tariff Act of 1930, as amended (19 U.S.C.
1466(a)) provides, in pertinent part, that:
The equipments, or any part thereof ...
purchased for, or the repair parts or
materials to be used, or the expenses of
repairs made in a foreign country upon a
vessel documented under the laws of the
United States to engage in the foreign or
coasting trade, or a vessel intended to be
employed in such trade, shall, on the first
arrival of such vessel in any port of the
United States, be liable to entry and the
payment of an ad valorem duty of 50 per
centum on the cost thereof in such foreign
country.
In its administration of the vessel repair statute, Customs
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. (See Otte v. United States, 7 Ct.
Cust. Appls. 166, T.D. 36489 (1916); United States v. Admiral
Oriental Line et al., 18 C.C.P.A. 137, T.D. 44359 (1930); and
Customs Bulletin and Decisions, Vol. 31, Number 40, published
October 1, 1997.) The factors discussed within the cited cases
are not by themselves necessarily determinative, nor are they the
only factors which may be relevant in a particular case.
However, in a given case, these factors may be illustrative,
illuminating, or relevant with respect to the issue of whether
certain work may be a modification of a vessel which is
nondutiable under the law.
While it is true that certain foreign shipyard operations
such as proven modifications are considered to be non-dutiable,
it is also the case that pursuant to published Customs Service
rulings (C.I.E. 1325/58 and C.I.E. 565/55), duties may not be
remitted in cases where invoices fail to segregate dutiable from
non-dutiable expenditures. The presence of unsegregated
expenses will render an entire item subject to duty as a repair
expense, which item might otherwise qualify for duty-free
treatment. This element comes into play in situations in which
the item to be modified is in need of repair at the time the
modification is performed.
In Texaco Marine Services, Inc., and Texaco Refining and
Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the
U.S. Court of International Trade (CIT) considered whether costs
for post-repair cleaning and protective coverings incurred
pursuant to dutiable repairs
constituted "expenses of repairs" as that term is used in 19
U.S.C. 1466. In holding that these costs were dutiable as
"expenses of repairs" the court adopted the "but for" test
proffered by Customs; that is, such operations were an integral
part of the dutiable repair process and would not have been
necessary "but for" the need to conduct dutiable repairs.
On appeal, the Court of Appeals for the Federal Circuit
(CAFC) issued a watershed decision which not only affirmed the
opinion of the CIT regarding the specific expenses at issue, but
also provided clear guidance with respect to the interpretation
of 19 U.S.C. 1466, and thus the Customs administration of that
statute. In upholding the "but for" test adopted by the CIT the
CAFC stated:
...the language expenses of repairs' is broad and
unqualified.
As such, we interpret expenses of repairs' as covering
all
expenses (not specifically excepted in the statute)
which,
but for dutiable repair work, would not have been
incurred.
Conversely, expenses of repairs' does not cover
expenses
that would have been incurred even without the
occurrence
of dutiable repair work. As will be more clearly
illustrated
below...the but for' interpretation accords with what
is
commonly understood to be an expense of repair.
44 F.3d 1539, 1544.
In reaching its determination the CAFC steadfastly rejected
the non-binding judicial authority relied upon by the
plaintiff/appellant. Specifically, the court addressed the
following court cases:
1. Mount Washington Tanker Co. v. United States, 505 F.Supp. 209
(CIT 1980) which held that transportation compensation for
members of a foreign repair crew performing dutiable repairs was
not dutiable as an expense of repairs;
2. American Viking Corp. v. United States, 150 F.Supp. 746
(Cust.Ct. 1956) which held that the expense of providing lighting
needed to perform a dutiable repair was not dutiable as an
expense of the repair; and
3. International Navigation Co. v. United States, 148 F.Supp.
448 (Cust.Ct. 1957) which held that transportation expenses for a
foreign repair crew to travel to and from an anchored vessel
being repaired were not dutiable as expenses of repairs.
With regard to these three cases, the CAFC stated that,
"Seemingly, these expenses too would have been viewed as coming
within the [vessel repair] statute if the court had used a "but
for" approach." 44 F.3d 1539, 1547. The CAFC concluded, "Thus
Mount Washington Tanker, like American Viking and International
Navigation, was incorrectly decided." Id.
Recognizing that the decision of the CAFC was not only
dispositive of the expenses at issue, but also instructive as to
proper administration of the vessel repair statute with respect
to the interpretation of the term "expenses of repairs" contained
therein, the Assistant Commissioner, Office of Regulations and
Rulings, issued a memorandum to the Regional Director, Commercial
Operations, New Orleans (file no. 113308) dated January 18, 1995.
That memorandum was published in the Customs Bulletin on
February 8, 1995 (Customs Bulletin and Decisions, vol. 29, no. 6,
at p. 59) In that memorandum, copies of which were disseminated
to the other Customs field offices charged with the liquidation
of vessel repair entries, it was stated that pursuant to the
decision of the CAFC, a myriad of foreign repair expenses
previously accorded duty-free treatment would, under certain
circumstances, no longer receive such treatment. The memorandum
further provided that any such affected costs contained in vessel
repair entries not finally liquidated as of the date of the CAFC
decision (December 29, 1994) should be liquidated as dutiable
"expenses of repairs" provided they were first examined under the
"but for" test discussed above.
Subsequent to the publication of the above-cited memorandum,
on February 22, 1995, various representatives of U.S.-flag vessel
owners/operators met with the Assistant Commissioner, Office of
Regulations and Rulings, and members of his staff. It was the
collective opinion of the vessel owners/operators that the
memorandum should be rescinded, contending, inter alia, that it
was violative of 19 U.S.C. 1625(c)(1) and 19 CFR Part 177.
Upon further review of the matter, the Assistant Commissioner
issued a second memorandum to the Regional Director, Commercial
Operations Division, New Orleans (file no. 113350), dated March
3, 1995. This memorandum was published in the Customs Bulletin
on April 5, 1995 (see Customs Bulletin and Decisions, vol. 29,
no. 14, at p. 24). The latest memorandum clarified the January
18 issuance with respect to Customs implementation of the CAFC
decision. It provided that all vessel repair entries filed with
Customs on or after the date of that decision were to be
liquidated in accordance with the full weight and effect of the
court decision (i.e., costs of post-repair cleaning and
protective coverings incurred pursuant to dutiable repairs are
dutiable and all other foreign expenses contained within such
entries are subject to the "but for" test). With respect to
vessel repair entries filed prior to December 29, 1994, all costs
for post-repair cleaning and
protective coverings incurred pursuant to dutiable repairs are
dutiable. It further provided that in view of the fact that
carriers have relied upon Customs rulings (some of which were
based on court cases which the CAFC in Texaco held were
incorrectly decided), and because retroactive application would
cause both the Government and the carriers a major administrative
burden, Customs would not apply Texaco retroactively except as to
the two issues directly decided by the court. All other costs
contained within such entries would be accorded that treatment
previously accorded them by Customs prior to the decision of the
CAFC in the Texaco case. Parenthetically, we note that the CAFC
decision was published in its entirety in the Customs Bulletin on
March 8, 1995 (See Customs Bulletin and Decisions, vol. 29, no.
10, at p. 19).
In regard to surveys or inspections, the general rule is
that a survey undertaken to meet the specific requirements of a
governmental entity, classification society, or insurance carrier
is not dutiable even when dutiable repairs are effected as a
result of a survey. When an inspection or survey is conducted to
ascertain the extent of damage sustained or whether repairs are
necessary, the survey cost is dutiable as part of the repairs
which are accomplished.
Insofar as cleaning operations are concerned, Customs has
held that cleaning operations which remove rust and deterioration
or worn parts, and which are a necessary factor in the effective
restoration of a vessel to its former state of preservation,
constitute vessel repairs. Analogous to Customs position
regarding the dutiability of surveys, Customs has long held that
the cost of 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 (see C.I.E.'s 18/48; 125/48; 910/59; 820/60; 51/61;
569/62; and 698/62).
We now turn to consideration of the items presented, and
will utilize the numbering system which the Liquidation Unit used
in forwarding the application:
1. General Services. The claim is made that all of the costs
associated with this category have traditionally been held to be
free of duty. As explained in ample precedent, Customs considers
the types of expenses associated with these costs to be
proratable under the terms of the Court opinion in Texaco, supra.
We find that the expenses of General Services should be prorated
between dutiable and nondutiable costs as reflected on the vessel
repair entry.
2. High Pressure Hull Water Wash (205). The invoice indicates
hull cleaning for inspection purposes only, however, we note that
the next invoice item (206) covers the cost of hull painting. As
it appears that the hull washing was necessary for both purposes,
it is necessary to apportion the cost of the cleaning between
dutiable and non-dutiable elements.
3. Shell Connection Pipe Gauging (208). We find this expense to
cover a mandatory inspection/testing process with no repair
element. The item is duty-free.
4. Anchor Chain Inspection (209). The invoice reflects that this
item was a nondutiable ABS/USCG inspection and that no repairs
were performed. Accordingly, it is nondutiable.
5. Cargo Hold Bilge Well Cleaning (214). Bilge Wells are also
known as Rose Boxes. The United States Customs Court had
occasion to examine 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
cost of this item is not subject to duty.
6. Pintle Pin (Bush Survey) (216). The invoice reflects that
this item was a nondutiable ABS/USCG inspection and that no
repairs were performed. Accordingly, it is nondutiable.
7. Rudder Survey (217). Same result as item 6, above.
8. Carrier Bearing Inspection (218). Same result as item 6,
above.
9. Stock Nut Survey (219). Same result as item 6, above.
10. Chain Locker Survey (222). Same result as item 6, above.
11. Ballast Deep Tank Survey (225). Same result as item 6,
above.
12. Heavy Fuel Oil Wing Tank Survey (228). Same result as item
6, above.
13. M.E.L.O. Sump Tank C Survey (229). Same result as item 6,
above.
14. Bow Thruster Inspection (302). Same result as item 6, above.
15. Engine and Independent Bilge Valve Inspection (304). Same
result as item 6, above.
16. Propeller Inspection (307). Same result as item 6, above.
17.Tailshaft Survey (309). Same result as item 6, above.
18. Propeller Removal for Inspection (310). Same result as item 6,
above.
19. Cooler, Central FCW #1 Survey (313). Same result as item 6,
above.
20. Cooler, Central FCW #2 Survey (314). Same result as item 6,
above.
21. Exhaust Gas Boiler (EGE) (315). Same result as item 6, above.
22. Boiler, Oil-Fired Clean for Inspection (316). Same result as
item 6, above
23. Shafting and Bearing Survey (317). Same result as item 6,
above.
24. Sea Valves, Chests, etc. Survey (318). Same result as item 6,
above.
25. Sea Cooling Water System Inspection (320). Same result as item
6, above.
26. Bow Thruster Controller (401). Same result as item 6, above.
27.Corrugated Bulkhead FR271 Modification (501). The applicant
states that "the requirement for this modification was a 'design
defect' in the original construction of the vessel. The original
construction created a 'hard spot' which lead to bulkhead
cracking." Work performed to remedy present "bulkhead cracking" is
dutiable, but there is no evidence of any need for repair at the
time the modification work was performed. Accordingly, this item
is not dutiable as a repair under 19 U.S.C. 1466.
28.No. 3 Cargo Hold Structural Modifications (502). The applicant
states: "This again is a modification to correct an original design
defect. The P/S corner of the #3 cargo hold at level 10790 above
base line as originally designed was leading to structural failure
problems. This modification was initiated to first strengthen the
deficiency in the structure (the new insert plate is 12mm in lieu
of 8mm plate thickness), but more importantly, to more evenly
distribute the structural stresses by increasing the inside corner
radius..." Most significantly, we find evidence in the repair yard
invoice of "fractures at both Port and Stbd locations." As such,
we find that this item is a dutiable repair. Based upon the
information provided, we are unable to draw a meaningful
distinction between this item and item 503, below.
29. Slim-Guide Bracket to Platform Modifications (503). The
applicant states: "The existing brackets connecting the stantion to
the container "slim-guide" fractured. Rather than just rewelding
the fracture, a new design bracket was engineered, fabricated, and
installed..." This item is a dutiable repair under 19 U.S.C. 1466.
The fact that a new design bracket was engineered does not change
this result since it was also necessary to repair a fracture as
part of the process.
30. Hatch Coaming Stays Modification (504). The applicant states:
"A new 'toe piece' was designed to correct this design defect to
better distribute the stresses by way of the 160mm radius of the
toe piece and the 30mm radius toe with a wrap-around weld." We
find that this item is a nondutiable modification.
31. Web Frame 310 Bracket Modifications (505). First time
installation of a feature, permanently installed. The item is non-dutiable.
32. High (Aux) Sea Chest Vent Modification (506). The applicant
states: "The initial location of the 80mm vent line in the bay
between frames 99-100 was not removing the entrapped air generated
in the bay between frames 98-99. This entrapped air was causing
operational problems in the sea water circulator pump. To correct
this design defect problem, it was necessary to make this
modification for efficient operation of the vessel." We find that
this item is a nondutiable modification.
33. Anchor Pocket Modification (507). The applicant states: "...
there has [sic] been problems with the anchor stowage...Enc. (L)
details to [sic] structural modifications engineered to correct
this deficiency and to improve the existing anchor stowage system."
We find that this item is a nondutiable modification.
34. Web Frame Lug/Clip Modifications (508). The applicant states:
"This is a new, previously non-existent 15mm steel plate bracket
permanently installed by welding with a 6mm fillet weld wrapped
around all ends." We find that this item is a nondutiable
modification.
35.Main Engine Charge Air Cooler Clean System (510). The invoice
reflects, and the applicant states, that this item is a "new,
previously non-existent system." We find that this item is a
nondutiable modification.
36.Category B Items, General Services (121,123, 127 and 132).
These are charges for telephone calls, shore power, fresh water,
and ballast water which should be apportioned as between the
dutiable and non-dutiable expenses found in the entry as a whole.
37.C.O. #1, Bow Thruster Service Engineer. This cost is dutiable.
The applicant states that the bow thruster service representative
is a U.S. citizen and resident, and that the cost associated with
the engineer should be nondutiable. The applicant has not provided
sufficient information with respect to its claim of nondutiability.
For example, if the applicant is attempting to claim that the
subject cost is subject to remission pursuant to 19 U.S.C.
1466(d)(2), complete information with respect to that claim must be
provided. The pertinent invoice reflects that the engineer
performed services with respect to the "MV President Adams item
#302 and 303." While item 302 has been found by the Liquidation
Unit to be nondutiable, item 303 is listed as dutiable on the
spreadsheet, and that item is not involved in this application.
38. C.O. #2, No. I Deep Tank Modifications. The applicant claims
that prefabricated steel is non- dutiable under 19 U.S.C.
1466(h)(3), which provides:
The duty imposed by section (a) of this section shall not
apply to -
(3) the cost of spare parts necessarily installed before
the first entry into the United states, but only if duty
is paid under appropriate commodity classifications of
the Harmonized Tariff Schedules of the United States upon
first entry into the United States of each such spare
part purchased in, or imported from, a foreign country.
For the purpose of 19 U.S.C. 1466(h), we have found that a
part is determined to be something which does not lose its
essential character or its identity as a distinct entity but which,
like materials, is incorporated into a larger whole. It would be
possible to disassemble an apparatus and still be able to identify
a part. The term part does not mean part of a vessel, which
practically speaking would encompass all elements necessary for a
vessel to operate in its designed trade. Examples of parts as
defined are seen in such items as piston rings and pre-formed
gaskets, as opposed to gaskets which are cut at the work site from
gasket material.
There is no indication or statement as to which "spare parts"
the applicant seeks relief for pursuant to 19 U.S.C. 1466(h)(3).
The applicant has not established that the prefabricated steel is
a part under 19 U.S.C. 1466(h)(3). Therefore, the steel is
dutiable under 19 U.S.C. 1466(a). Our determination and analysis
is the same here as in Ruling 113883 dated April 1, 1997.
39. C.0. #3, Examination of Main and Emergency Switchboards. The
applicant states that this is a mandatory regulatory requirement.
We find that this item is nondutiable.
40. C.O. #5, Hull Thickness Gauging for ABS Hull Special Survey #2.
Same result as item 39, above.
41. C.O. #6, F.O. Tank Cleaning 5F(s), 5A(P/S), 6A(P/S). This is
a cleaning operation which is segregated from the cost of
associated repair. The item is duty-free.
42. C.O. #10, Rudder Stock Carrier Bearing Packing. It is claimed
that this should be a duty-free item under the terms of subsection
(h)(3) of the vessel repair statute. The applicant confirms that
the item in question is "material." Since (h)(3) contemplates
pre-entry installation of "parts" only, the cost of this item is
subject to vessel repair duty.
43. C.O. #11, Reefer Transformer Cleaning. This is a cleaning
operation with no accompanying repair. The item is duty-free.
44. C.O. #12, Low Level Alarm Switch in M/E Lube Oil Sump Tank.
This item involves the relocation of an existing feature, and is
thus considered a modification which is not subject to duty.
45. C.O. #14, Additional Hatch Coaming Stays. This involves the
addition of eight more stays, permanently installed. No repairs
are noted. The item is duty-free.
46. C.O. #21, Number 7A Cargo Hold Bracket Modification. This item
involves the renewal of the radar reflector extension piece. This
element suggests a repair, and the item is dutiable.
47. C.O. #24, Fifth Deck Ladderway Access Modification. We note
mention of a 60mm fracture in the invoice for this item. The item
is subject to duty.
48. C.O. #25, Number 7 Cargo Hold Bracket. This involves a lower
bracket modification which is not subject to duty.
49. C.O. #31, Number 3 Cargo Hold Modification. This involves a
modification with no repair noted. The item is not subject to
duty.
50. Item No. 23 (CF 226) International U/W Paint. The applicant
claims non-dutiability under 19 U.S.C. 1466(h)(2), which provides:
The duty imposed by subsection (a) of this section shall
not apply to-
... (2) the cost of spare repair parts or materials
(other than nets or nettings)
which the owner or master of the vessel certifies are
intended for use aboard a cargo vessel, documented under
the laws of the United States and engaged in the foreign
or coasting trade, for installation or use on such
vessel, as needed, in the United States, at sea, or in a
foreign country, but only if duty is paid under
appropriate commodity classifications of the Harmonized
Tariff Schedule of the United States upon first entry
into the United States of each such spare part purchased
in, or imported from, a foreign country...
Section 1466(h)(2) contemplates consumption entry of the
pertinent part or material, and the payment of duty under the
appropriate commodity classification of the HTSUS prior to the use
of the pertinent part or material in the foreign shipyard. The
applicant has provided no information which would support a claim
that the subject paint was entered and duty-paid prior to its use
in the foreign shipyard. Accordingly, the applicant's claim for
treatment under 19 U.S.C. 1466(h)(2) is denied. The paint is
dutiable under 19 U.S.C. 1466(a).
HOLDING:
Following a thorough analysis of the facts as well as of the
law and applicable precedents, we have determined that the
Application for Relief should be granted in part and denied in part
as specified in the Law and Analysis portion of this ruling.
Sincerely,
Jerry Laderberg
Chief,
Entry Procedures and Carriers Branch