VES-13-18-RR:IT:EC 226729 GEV
Chief, Liquidation Section
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126
RE: Vessel Repair Entry No. 110-6461683-9; PRESIDENT JEFFERSON;
V-312/313;
Proration; Repairs; 19 U.S.C. 1466; Texaco Marine
Services, Inc., and Texaco Refining and Marketing,
Inc. v. United States, 44 F.3d 1539 (1994)
Dear Sir:
This is in response to your memorandum dated January 30,
1996, forwarding a petition for review of Headquarters Ruling No.
113501, dated October 24, 1995, on the above-referenced vessel
repair entry. You request our review with respect to numerous
expenditures contained therein. Our ruling is set forth below.
FACTS:
The PRESIDENT JEFFERSON is a U.S.-flag containership owned
and operated by American President Lines, Inc. The applicant
contends that the subject vessel encountered heavy weather while
en route on a loaded passage from Seattle, Washington, to
Yokohama, Japan, during December 7-20, 1994, resulting in damage
to the foremast, containers on board, and various deck fittings.
Temporary and some permanent repairs were performed by the crew
at sea and at Yokohama where the vessel arrived on December 21,
1994. The vessel departed Yokohama on the same day of its
arrival and then proceeded to Hyundai Mipo Dockyard Co., Ltd. in
Ulsan, Korea, where it incurred foreign shipyard expenditures
during December 31, 1994 - January 12, 1995. Subsequent to the
completion of the work in question, the vessel arrived in the
United States at Seattle, Washington, on February 4, 1995. A
vessel repair entry was timely filed.
Pursuant to an authorized extension of time, an application
for relief with supporting documentation was timely filed.
Customs rendered its decision on the application for relief
pursuant to Headquarters Ruling 113501, dated October 24, 1996.
A petition for review of the aforementioned ruling, dated January
12, 1996, was timely filed. You ask that we review the
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following items appearing on Hyundai Mipo Dockyard Co., Ltd.
invoice no. 945891, dated January 19, 1995, for which the
petitioner seeks relief: Item Nos. 002-123, 201, 218, 219, 220,
222, 223, 229, 335, 336 and 412. In addition, you ask that we
review charges incurred for overseas telephone calls appearing on
p. 8 of the spreadsheets included in the documentation you
forwarded.
ISSUE:
Whether the foreign costs for which the petitioner seeks
relief are dutiable pursuant to 19 U.S.C. 1466 as set forth in
Headquarters Ruling 113501.
LAW AND ANALYSIS:
Title 19, United States Code, 1466, provides in pertinent
part for the payment of an ad valorem duty of 50 percent of the
cost of "...equipments, or any part thereof, including boats,
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..."
Item Nos. 002-123 (excluding Item no. 113), cover the
costs of the following general services/drydocking expenses
incurred during the period of time the subject vessel was in the
shipyard:
Item No. 002 - Insurance
Item No. 007 - Security
Item No. 101 - Lay Berth
Item No. 102 - Telephone Services (including the
overseas calls in question)
Item No. 103 - Fire Watch
Item No. 104 - Fireline Water
Item No. 106 - Garbage Removal
Item No. 107 - Crane Service
Item No. 108 - Shore Power
Item No. 109 - A/C and Provisional Reefer Cooling Water
Item No. 110 - Fresh Water Supply
Item No. 112 - Tugboats/Pilots
Item No. 114 - Ship's Service Air
Item No. 116 - Engine Room Bilge Pumping to Holding
Tank
Item No. 117 - Gas Free Certificate
Item No. 118 - Temporary Lighting and Ventilation
Item No. 121 - Steam Heat to Quarters
Item No. 122 - Distilled Water Supply
Item No. 123 - Reballast Vessel to Undock
Item No. 201 - Drydock Vessel - ABS/USCG Inspection
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The above costs were held to be dutiable on a pro rata basis
which the petitioner states, "...has no support whatsoever in the
statute, regulations or case law." (See petition at p. 3) We
disagree. Such treatment is well-founded in all three of the
aforementioned authority inasmuch each authorizes Customs
assessment of duty on the "expenses of repairs". (See 19 U.S.C.
1466(a), 19 CFR 4.14(a), and Texaco Marine Services, Inc.,
and Texaco Refining and Marketing, Inc. v. United States, 815
F.Supp. 1484 (CIT 1993), 44 F.3d 1539 (CAFC 1994)) With respect
to the aforementioned statement of the petitioner, upon reviewing
the petition it is readily apparent that the focus of his
argument is what he perceives is Customs misapplication of the
court's decision in Texaco, supra. However, the petition is
unclear as to how Customs allegedly misapplied this decision. If
the petitioner is arguing that drydocking is never a part of the
"but for" test established by the court in Texaco, supra, or, in
the alternative, that in the subject entry the drydocking
expenses incurred were unrelated to any dutiable repairs, both
arguments fail for the reasons set forth below.
In Texaco Marine Services, Inc., and Texaco Refining and
Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the
issue before the U.S. Court of International Trade (CIT) was
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 the costs at issue were dutiable as "expenses of repairs"
the court adopted the "but for" test proffered by Customs; that
is, these costs were an integral part of the dutiable repair
process and would not have been necessary "but for" the dutiable
repairs.
On appeal, the U.S. 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, hence, 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.
The CAFC discussed at length the case of United States v.
George Hall Coal Co., 142 F. 1039 (1906), heavily relied upon by
the plaintiff/appellant for the proposition that drydocking
expenses are not an expense of repair and therefore are not
dutiable. It is noteworthy that the published decisions in
George Hall Coal (T.D. 24932 (1904), aff'd 134 F. 1003, T.D.
26038
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(1905), aff'd 142 F. 1039, T.D. 27068 (2nd Cir. 1908)) address
jurisdictional issues and are silent as to the dutiability of
drydocking expenses. 44 F.3d 1539, 1545 at fn. 5 However, the
CAFC examined the rationale provided in a December 31, 1903,
unpublished decision of the Department of Treasury Board of
General Appraisers (Board) which is the underlying decision in
the aforementioned published cases. The CAFC stated that this
examination was necessary because "...subsequent decisions of the
Court of International Trade and its predecessor, the Customs
Court, have viewed George Hall Coal as standing for the
proposition that the cost of a place to do work (i.e., a drydock)
is not dutiable as an expense of repairs, which in fact it does
not." 44 F.3d. 1539, 1546 at fn. 6 In examining this decision
the court noted that, "...the Board held the dry-docking expense
was not subject to the vessel repair duty because the Board found
that the expense would have been incurred irrespective of whether
or not dutiable repairs were performed." 44 F.3d 1539, 1546 The
CAFC went on to state, "George Hall Coal simply stands for the
proposition that expenses that would have been incurred
irrespective of whether or not dutiable repairs are performed are
not dutiable as an expense of repairs." Id. It therefore
concluded, "...George Hall Coal is entirely consistent with the
but for' interpretation of the statute." Id.
In this case, the evidence indicates that the drydocking was
done to effect repairs as well as survey inspections. The
Hyundai Mipo Dockyard Co., Ltd. invoice shows that the hull was
prepared for painting and painted while in drydock, bow thruster
repairs were made while in drydock, and the stern tube outer seal
was removed, overhauled and replaced while in drydock. (See
Items 225, 226, 301 and 304 of that invoice). Furthermore, the
contracts for C.H. Murphy Inc., Molnar Service Co., Inc., and
Seamar Electronics Inc. refer to the work to be performed "during
the drydock repair period." We note that the petitioner admits
that the hull painting was dutiable on the entry documents. The
petitioner makes a similar admission with respect to the overhaul
of the stern tube and the bow thruster seal and anode
replacements.
Consequently, if the petitioner's argument is that
drydocking expenses always fall outside the "but for" test, that
point was answered in the negative by the court in Texaco in
footnotes 5 and 6 of the opinion discussed above. If the
petitioner's argument is that the drydocking expenses in this
case are unrelated to contemplated or performed repairs, the
evidence, discussed above, contradicts that argument.
In recognizing the inequities owing to a total assessment of
duty on expenses that are also attributed, in part, to non-dutiable costs, on p. 8 of Headquarters Ruling 113474, dated
October 24, 1995, and cited by the petitioner, Customs stated, in
pertinent part:
"A "but for" test was utilized by the court in the
Texaco [case], supra.,
which test bases dutiability under the vessel repair
statute upon findings
that but for dutiable repair operations, an associated
expense would not
have been incurred. To be sure, in a great many vessel
repair cases which
include dry dock expenses there is at least some non-dutiable element
which could justify placing a vessel in dry dock. We
understand from the
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decision of the CAFC in Texaco, supra., that dock
charges are non-dutiable
if the underlying reason for dry-docking is not subject
to duty, and that
such charges are dutiable if dutiable operations
underlie the docking. Proper implementation of the
decision of the court requires that we consider the
duty consequences in circumstances in which a mixed
justification for dry-
docking is present."
"Customs has experience in duty determinations in
another area involving a
mixed-purpose vessel repair expense. Under the
rationale provided by a
long-standing published ruling (C.I.E. 1188/60) the
cost of obtaining a gas-
free certification, a necessary precursor to the
initiation of any hot work
(welding) which may be necessary, constitutes an
expense which is associated
with shipyard operations. Since the expense is
incurred without respect to
whether the hot work to follow might constitute
dutiable repair work, or is
in connection with duty-free modification work, it is
the practice of Customs
in liquidating such expenses to apportion the gas-freeing charges between
the cost of items which are remissible and those which
are subject to duty.
We are guided by the determination of the court in
Texaco, supra., to apply
the same formula to mixed-purpose dry-dock expenses.
Accordingly, the
cost associated with item 14 should be apportioned to
reflect the dutiable
and non-dutiable foreign costs in this entry."
The vessel repair entry now under consideration which, as
stated above, covers "mixed-purpose" expenses, was filed after
the CAFC decision in Texaco. In Headquarters Memorandum 113350,
dated March 3, 1995, published in the Customs Bulletin and
Decisions on April 5, 1995 (Vol. 29, No. 14, p. 24), we stated in
pertinent part:
"All vessel entries filed with Customs on or after the
date of that decision
[the CAFC decision in Texaco, December 29, 1994] are to
be liquidated
in accordance with the full weight and effect of the
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)."
In accordance with Headquarters Ruling 113474 and Memorandum
113350, and as your forwarding memorandum states, the general
services/drydocking charges in question, including the overseas
telephone calls for which the petitioner seeks relief, should be
prorated between the dutiable and nondutiable costs associated
with the drydocking. Notwithstanding the petitioner's claim to
the contrary, the method of prorating is workable
administratively as was described in Headquarters Ruling 113474,
supra: the drydocking costs "should be apportioned to reflect the
dutiable and non-dutiable foreign costs in this entry." For
example, if, aside from the subject "drydocking costs," as
described supra, fifty percent of the costs of that particular
drydocking were dutiable and fifty percent were nondutiable, then
fifty percent of the subject "drydocking
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costs," as described supra, would be dutiable and fifty percent
would be nondutiable. (See Headquarters Ruling 226826, dated May
2, 1996) This is in accord with C.I.E. 1188/60 which states, in
pertinent part, "In liquidation, this charge [of obtaining a gas-free certificate] should be apportioned between the costs which
are to be remitted and those for which relief is not warranted
and duty assessed on that portion of the charge applicable to
items which are not being remitted."
The following costs for which the petitioner seeks relief
also were held to be dutiable on a pro rata basis:
Item No. 218 - Salt Water Double Bottom Tanks, ABS &
USCG Inspection
Item No. 219 - Forepeak Void - ABS & USCG Inspection
Item No. 220 - Aft Peak Tank
Item No. 222 - Fuel Oil Wing Tanks (1000 BBLS AVG.) -
ABS & USCG Inspection
Item No. 223 - Salt Water Ballast Deep Tanks - ABS &
USCG Inspection
The petitioner contends that, "...these five items should
not be pro-rated, but rather should be afforded duty-free
treatment as being mandatory regulatory inspections." (See
petition at p. 2) Upon reviewing the record, we note that the
invoice descriptions under each item are not indicative of
dutiable work and that these charges were incurred pursuant to
the nondutiable drydock survey. Accordingly, these five items
are nondutiable.
Item 113 is entitled, "DOCK TRIAL" and provides as follows:
"Provide additional mooring for carrying out four hour
dock trial
upon completion of main engine and auxiliary support
system
inspections, and modifications. Gangway to be swung
clear of
vessel, and propeller and bow thruster tunnel areas to
be kept
clear. Necessary personnel, according to normal yard
practice,
are to be kept in attendance during this trial."
The petitioner states that, "[t]he Dock Trial was limited to
testing of non-dutiable work; no dutiable work was tested."
However, this statement is not corroborated by the above-referenced invoice description, nor any other documentary
evidence contained within the record. Although this item may
have included the trial of nondutiable work, the petitioner's
statement that it was limited to that work is devoid of
evidentiary support. Customs has long-held that relief may not
be granted in the absence of a segregation of dutiable and non-dutiable costs. (C.I.E.s 1325/58 and 565/55) Accordingly, Item
113 remains dutiable in its entirety.
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Item 229 is entitled, "HATCH COVER GASKET REPAIR". The
petitioner states:
"This is a transportation item. There were no repairs
included in
this item. It is the removal and replacement of the
hatch covers to
and from to a suitable location for inspection."
"Pre-'Texaco', this item has been afforded non-dutiable
status. For
reasons stated above we do not believe Texaco applies,
therefore
this item, in our opinion, should be duty-free." (See
petition at p. 3)
No documentary evidence has been submitted to support the
petitioner's position. As discussed above, Texaco does apply to
this entry therefore whatever dutiable status that may have been
accorded this expense prior to that court case is now irrelevant.
Furthermore, upon examining the invoice description of this item
number, we note that contrary to the petitioner's contention, the
work in question involves more than mere transportation. The
invoice provides as follows:
"Remove all hatch covers ashore or to floor of the
drydock. Block
up covers and clean for underside inspection. Inspect
all hatch covers
and report to owners superintendant [sic]. Any
authorized repairs to be
covered under a point' item." (Emphasis added)
It is therefore readily apparent that cleaning was performed
in conjunction with transportation under this item. In addition,
the cleaning was done prior to dutiable repairs to the hatch
cover rubber packing and channels (See Item 229.1 of the
invoice). Notwithstanding
Texaco, supra., under which this item would be held dutiable,
Customs has long-held cleaning done in preparation of dutiable
repairs to be dutiable. (C.I.E.s 51/61, 429/61 and 596/62).
Accordingly, Item 229 remains dutiable.
Items 335 and 336 both cover the use of a solvent to remove
oil sludge deposits from the lube oil cooler. We note that both
items contain the statement, "This is a cleaning item only, no
repairs." 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
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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).
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 costs of
cleaning the lube oil cooler covered by Items 335 and 336 are
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 collection of oil sludge deposits results in a
diminished engine function. The removal of these deposits
through the use of a solvent results in a restoration of the lube
oil cooler to good condition. 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. (See also Headquarters Rulings 111821,
111822 and 111903 wherein Customs held the removal of carbon and
oil deposits from the main engine scavenger spaces to be a
dutiable maintenance operation) Accordingly, Items 335 and 336
constitute dutiable maintenance operations.
Item 412 is entitled, "BOW THRUSTER" and provides as
follows: "1. Checked & megger tested electric cable & bow
thruster motor. 2. Tested good order." The petitioner states
that with respect to this item, "No repairs were performed."
(See petition at p. 3) It is further stated that, "[t]his item,
being a mandatory regulatory requirement, should be non-dutiable." Id. As to the former statement, the record does not
support such a claim (See Items 304 and 343 of the shipyard
invoice covering dutiable work done to the bow thruster). As to
the latter, we also note that neither the shipyard invoice nor
the survey documentation included within the petitioner's
submissions support such finding. Accordingly, Item 412 remains
dutiable.
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HOLDING:
The foreign costs for which the petitioner seeks relief are
dutiable pursuant to 19 U.S.C.
1466 as discussed in the Law and Analysis portion of this
ruling.
Sincerely,
William G. Rosoff
Chief
Entry and Carrier Rulings Branch