VES-13-18-RR:IT:EC 227063 GOB
Port Director of Customs
Attn.: Vessel Repair Liquidation Unit, Room 415
P.O. Box 2450
San Francisco, CA 94126
RE: Vessel Repair Entry No. C31-0015281-9; 19 U.S.C. 1466; ARCO
INDEPENDENCE, V-152; Petition; Drydocking
charges; Maintenance
Dear Sir or Madam:
This is in response to your memorandum dated March 12, 1996,
which forwarded the petition for relief submitted by ARCO Marine,
Inc. ("petitioner") with respect to the above-referenced vessel
repair entry.
FACTS:
The ARCO INDEPENDENCE ("the vessel") is a U.S.-flag vessel
owned and operated by the petitioner. Certain foreign shipyard
work was performed on the vessel in 1995. The vessel arrived at
the port of Valdez, Alaska on October 18, 1995. The subject
entry was subsequently filed.
In Ruling 226826 dated May 2, 1996, the application for
relief was granted in part and denied in part.
The petitioner asks for relief with respect to the following
items:
drydock charges
ABS Alteration/Modification survey
Item 408 (408.3, 408.4) - mooring line
Item 424 - IGS deck isolation and mast riser valve
Item 433 - IGS scrubber
Item 450 - power/water line maintenance
ISSUE:
Whether the subject items 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 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, either in a structural sense or as
demonstrated by means of attachment so as to be indicative of a
permanent incorporation. See United States v. Admiral Oriental
Line, 18 CCPA 137 (1930). However, we note that a permanent
incorporation or attachment does not necessarily involve a
modification; it may involve a dutiable repair.
2. Whether in all likelihood an item would remain aboard a
vessel during an extended lay-up.
3. Whether an item 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 provides an improvement or enhancement
in operation or efficiency of the vessel.
Our analysis in this matter is based primarily on the
pertinent invoices. The assertions of the petition are not
considered to be documentary evidence. In this regard, we note
the statement of the court in Bar Bea Truck Leasing Co., Inc. v.
United States, 5 CIT 124, 126 (1983):
Again, plaintiff has presented no affidavit or other
evidence in support of its counsel's bald assertion...
If we are unable to determine the precise nature of certain
work because of the lack of clear and probative documentary
evidence, and are thus unable to determine that it is
nondutiable, such work will be found dutiable. In this regard,
we note the statement of the Customs Court in Admiral Oriental
Line v. United States, T.D. 43585 (1929):
The evidence is conflicting upon that point, and the
plaintiff has not proved the collector's classification to
be wrong. The burden is upon the plaintiff to show not only
that the collector was wrong in his classification but that
the plaintiff was right.
In Sturm, A Manual of Customs Law (1974 ed.), p. 173-174,
the author states, in pertinent part:
Where Congress has carved out special privileges or
exemptions from the general provisions levying duties upon
imported articles, the courts have strictly construed such
exceptions and have resolved any doubt in favor of the
government. Swan & Finch Company v. United States, 190 U.S.
143, 23 SCR 702, 47 L. Ed. 984 (1903); Pelz-Greenstein Co.
v. United States, 17 CCPA 305, T.D. 43718 (1929)...
...
An exception which carves out something which would
otherwise be included must be strictly construed. Goat &
Sheepskin Import Co., et al. v. United States, 5 Ct. Cust.
Appls. 178, T.D. 34254 (1914); [et al.]
The petitioner takes issue with the statement of Ruling
226826 that the vessel repair entry "was untimely by one day in
that it was filed on the sixth business day (October 26, 1995)
after arrival of the vessel (October 18, 1995)." The petitioner
states that the entry was received by Customs on October 20,
1995. We note initially that no sanction has been imposed in
this case for untimely finding, nor did that statement of Ruling
226826 have any effect upon any finding of that ruling with
respect to the dutiability or nondutiability of any items. We
note additionally that the CF 226 (the vessel repair entry) has
the date "10-26-95" handwritten just under the box in the upper
right-hand corner of the CF 226; such box is to contain the entry
number and date. We take this to indicate that the vessel repair
entry was received by Customs on October 26, 1995, and was
therefore untimely. There is no indication on the CF 226 that
the entry was filed on October 20, 1995, or on any date other
than October 26, 1995. As stated supra, the apparent untimely
filing of the entry has no effect on Ruling 226826, nor will it
have any effect on this ruling.
After a consideration of the documentation of record we make
the following determinations.
Proration Issue. In Texaco Marine Services, Inc. and
Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp.
1484 (CIT 1993), 44 F.3d. 1539, 1544 (CAFC 1994), the Court of
Appeals for the Federal Circuit stated in pertinent part:
Texaco urges us to reject the Court of International Trade's
"but for" approach and to interpret "expenses of repairs" so
as to exclude those expenses (e.g., expenses for clean-up
and protective covering work) not incurred for work directly
involved in the actual making of repairs. Such a reading
has no basis in the plain language of the statute, however.
Aside from the inapplicable statutory exceptions, the
language "expenses of repairs" is broad and unqualified. As
such, we interpret "expenses of repairs" as covering all
expenses (not specifically exempted in the statute) which,
but for dutiable repair work, would not have been incurred.
(Emphasis supplied.)
The subject vessel repair entry was filed after the CAFC
decision in Texaco. In 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 repair 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).
Memorandum 113350 was preceded by Memorandum 113308 dated
January 18, 1995. Memoranda 113350 and 113308 were both
published in the Customs Bulletin.
In Ruling 113474 dated October 24, 1995, we stated:
... the applicant contends that the CAFC decision in Texaco,
supra, should not be applicable to the subject vessel repair
entry and by doing so Customs has violated 19 U.S.C.
1315(d). Title 19, United States Code, 1315(d) provides,
in pertinent part, as follows:
No administrative ruling resulting in the imposition of
a higher rate of duty or charge than the Secretary of
the Treasury shall find to have been applicable to
imported merchandise under an established and uniform
practice shall be effective with respect to articles
entered for consumption or withdrawn from warehouse for
consumption prior to the expiration of thirty days
after the date of publication in the Federal Register
of notice of such ruling... (emphasis added)
The applicable Customs Regulations governing this matter are
found at 19 CFR Part 177 (entitled "Administrative
Rulings"). With respect to the applicability of 19 CFR Part
177, we note that neither of the two Headquarters memoranda
published in the Customs Bulletin are "rulings" within the
meaning of that part. Pursuant to 177.1(d)(1), Customs
Regulations, a "ruling" is defined as a "...written
statement issued by the Headquarters Office or the
appropriate office of Customs as provided in this part that
interprets and applies the provisions of the Customs and
related laws to a specific set of facts." (Emphasis added)
Neither memorandum applied 19 U.S.C. 1466 or 19 CFR 4.14
(the applicable Customs regulations promulgated pursuant to
1466) to a specific set of facts (i.e., no single vessel
repair entry containing foreign expenses was discussed).
Rather, they provided notice to the public that Customs will
administer 19 U.S.C. 1466 in accordance with the explicit
guidelines set by the CAFC in interpreting the term
"expenses of repairs" within the meaning of the statute as
determined by the "but for" test. Such guidelines, prior to
the date of that decision, were non-existent. Accordingly,
19 U.S.C. 1315(d) is inapplicable in these circumstances.
In Ruling 113500 dated October 24, 1995, we stated:
Specifically, the applicant contends that the publication in
the Customs Bulletin of memorandum 113308, subsequently
clarified by memorandum 113350, without the solicitation of
public comments, constitutes a violation of 19 U.S.C.
1625(c).
...
... the aforementioned memoranda did not modify or revoke
any prior interpretive ruling or decision or have the effect
of modifying the treatment Customs previously accorded
certain foreign expenses under 19 U.S.C. 1466. Rather,
the memoranda, in conjunction with the publication of the
CAFC decision in the Customs Bulletin, merely provided
notice to the public that the impetus behind any change in
Customs interpretation of the term "expenses of repairs"
within the meaning of the vessel repair statute is the CAFC
itself, not Customs.
...
With respect to the applicability of 19 CFR Part 177, we
note that neither of the two Headquarters memoranda
published in the Customs Bulletin are "rulings" within the
meaning of that part. Pursuant to 177.1(d)(1), Customs
Regulations, a "ruling" is defined as a "...written
statement issued by the Headquarters Office or the
appropriate office of Customs as provided in this part that
interprets and applies the provisions of the Customs and
related laws to a specific set of facts." (Emphasis added)
Neither memorandum applied 19 U.S.C. 1466 or 19 CFR 4.14
(the applicable Customs regulations promulgated pursuant to
1466) to a specific set of facts (i.e., no single vessel
repair entry containing foreign expenses was discussed).
Rather, they provided notice to the public that Customs will
administer 19 U.S.C. 1466 in accordance with the explicit
guidelines set by the CAFC in interpreting the term
"expenses of repairs" within the meaning of the statute as
determined by the "but for" test. Such guidelines, prior to
the date of that decision, were non-existent.
Further in regard to the applicability of 19 CFR Part 177,
it is noteworthy that since neither memorandum was a
"ruling" as defined in 19 CFR 177.1(d), the mere fact that
they were published in the Customs Bulletin does not, as the
protestant suggests, render either a "published ruling"
within the meaning of 19 CFR 177.1(d). Furthermore, in
view of the fact that 19 CFR 177.1(d) also defines a
"ruling letter" as "a ruling issued in response to a written
request therefor and set forth in a letter addressed to the
person making the request or his designee", neither
memoranda, which were issued at the behest of the Assistant
Commissioner, Office of Regulations and Rulings to the
Regional Director, Commercial Operations Division, New
Orleans, constituted a "ruling letter" for purposes of 19
CFR Part 177. The delayed effective date provisions of 19
CFR 177.9(d)(3), applicable to a "ruling letter" are
therefore of no consequence.
Accordingly, the provisions of 19 U.S.C. 1625 and 19 CFR
Part 177 are inapplicable to the subject application.
[End of excerpt from Ruling 113500.]
In Ruling 113474, we 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 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 hotwork (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 at issue here was filed after the
CAFC decision in Texaco. As stated supra, in Memorandum 113350
dated March 3, 1995, we stated in pertinent part:
All vessel repair 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 Ruling 113474 and Memorandum 113350, the
drydocking charges should be prorated between the dutiable and
nondutiable costs associated with the drydocking. The method of
prorating was described in 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 costs," as described supra, would be dutiable
and fifty percent would be nondutiable.
ABS alteration/modification survey. The petitioner asserts
that this item "covers non-dutiable modifications." The
pertinent invoice (Report UL5627-G) reflects various testing,
including testing of the following items: rudder, rudder
modification insert, emergency towing arrangement insert, and dye
penetrant. Also, the vessel's semi-balanced rudder was cropped
and inserted in accordance with an ABS drawing and the clearances
of the rudder bearing were measured.
We find this item to be nondutiable. There is no evidence
of a repair or of any repair-related items on the invoice. An
ABS survey is typically nondutiable if it does not include
repairs and if it is not related to repairs.
In Ruling 226486 dated November 29, 1995, in which we found
certain surveys to be nondutiable, we cited the following
authorities:
...C.S.D. 79-277, which states in pertinent part:
Where a survey is undertaken to meet the specific
requirements of a governmental entity, classification
society, insurance carrier, etc., the cost is not dutiable
even when dutiable repairs are effected as a result thereof.
Where an inspection or survey is conducted merely to ascertain
the extent of damages sustained or whether repairs are deemed
necessary, the costs are dutiable as part of the repairs which
are accomplished per the holding in CIE 429/61.
C.S.D. 89-94 stated in pertinent part:
Customs has held that where periodic surveys are undertaken
to meet the specific requirements of a classification society,
insurance carrier, etc., the cost of the surveys is not dutiable
even when dutiable repairs are effected as a result thereof;
however, in the liquidation process Customs should go beyond the
mere labels of "continuous" or "ongoing" before deciding
whether the item is dutiable. If an inspection or survey is
conducted as a part of an ongoing maintenance and repair
program labelled "continuous" or "ongoing" the cost is dutiable.
Also, if the survey is to ascertain the extent of damage
sustained, or to ascertain if the work is adequately completed,
the costs are dutiable as part of the repairs which are
accomplished pursuant to the holdings in C.I.E. 429/61, C.S.D.
79-2, and C.S.D. 79-277.
In C.I.E. 429/61 dated April 28, 1961 stated in pertinent
part:
In this regard, we concur in your opinion that the cost of
inspections which are in the nature of surveys are not
dutiable incidents coming within the thrust of section 3114,
Revised Statutes. However, expenses which are incurred in conducting inspections made subsequent to the repairs, so as to
ascertain whether the work has been properly performed, are
dutiable as integral parts of the expenses of repairs
although separately itemized. Moreover, testing which is
effected for the purpose of ascertaining whether repairs to
certain machinery or parts of the vessel are required, or are
performed in order to ascertain if the work is adequately
completed, are also integral parts of the repairs and are accordingly dutiable.
Item 408 (sub-items 408.3 and 408.04) - mooring line. After
a lengthy analysis, Ruling 226826 stated, in pertinent part:
... the separately itemized charges for removal of the old
wire (item 408.1 as amended by item 408.50), connecting the
new line to the winches (item 408.20, the addition of the
stern line rub bar (additional item 408.01), the addition of
greasing tubes (additional item 408.02) and the enlargement
of the holes in the winch drums to accept the new lines
(additional item 408-3) should be allowed.
The work described as repair in item 408.3 and the repair
work in additional item 408.04 is dutiable as a repair based
on the foregoing analysis.
Thus, what is at issue here is the work in item 408.3 and in
additional item 408.04.
The petitioner states:
The synthetic lines are susceptible to cutting and/or
abrasion by sharp metal objects. Therefore it was necessary
to grind down and/or build up rough spots that would have
sharp or uneven edges and would cut into the synthetic
lines. Similarly, rust or corrosion had to be removed, as
loose pieces would also work into synthetic line, and have
the abrasive or cutting effect, deleterious to the life of
the synthetic line.
The petitioner has submitted a letter dated May 22, 1996
from the vessel master, which states:
The wire mooring ropes were replaced with a synthetic
spectra line. When modifying the mooring system from wire
rope to a synthetic line, all the associate equipment must
also be modified to accommodate the spectra line. The
roller chocks and fairleads were in acceptable condition for
continued wire rope service but required modification for
spectra line service. Wire rope will place small grooves on
roller chocks and fairleads and strip away coating or even
rust on the landing surfaces. These small grooves and a
lack of coating will in no way harm the wire rope. This is
not the case with synthetic mooring lines. In preparation
for the new lines, it is operationally necessary to
eliminate or minimize the potential for rusty, uneven, steel
bearing surfaces which would adversely effect the life of
the spectra lines. The modifications to the roller chocks
and fairleads would not have been done if these surfaces had
remained in the wire rope service.
After a consideration of the evidence of record,
including the documentation submitted by the petitioner, we find
sub-item 408.3 and additional item 408.4 to be nondutiable.
Item 424 - IGS deck isolation and mast riser valve. In
Ruling 226826, we stated:
There is insufficient evidence to support the allegation of
the application that this item is nondutiable. We note that
there is no statement or affidavit of the master with
respect to this item. The work described appears to be
within the scope of dutiable repairs and support for a
contrary determination has not been documented. See the
excerpts on page three of this ruling from Bar Bea Truck
Leasing Co., Inc. v. U.S. and Admiral Oriental Line v. U.S.
Therefore, we find that it is dutiable. The case of Admiral
Oriental Line v. U.S., T.D. 45453 (Cust. Ct. 1932) does not
support the applicant's position in that, in Admiral
Oriental, there was undisputed testimony to the effect that
there was no existing defect to the generator house. Here,
there is no undisputed testimony. U.S. v. Admiral Oriental
Line, 18 CCPA 137 (1930) and C.S.D. 79-278 do not appear to
be directly on point except for the general proposition that
work performed to modify a vessel is not within the scope of
19 U.S.C. 1466.
The petitioner has submitted a letter dated May 22, 1996
from the vessel master, which states:
During this yard period the Deck Isolation valve and the
Mast Riser valve on the Inert Gas System were modified from
manual to remote operated valves. Prior to the modification
the valves were in good working order but required personnel
to go on deck and manually operate the valves. These valves
were modified and fitted with hydraulic actuators to permit
the Officer in Charge of Cargo transfer to remotely operate
the valves from the cargo room.
This statement is consistent with the explanation in the
body of the petition. Based on the evidence submitted, we now
find that this item is nondutiable. The letter of the vessel
master is sufficient to support the petitioner's claim.
Item 433 - IGS Scrubber. In Ruling 226826, we found this
item to be dutiable for the same reason as item 424. See the
excerpt from Ruling 226826, supra, under item 424. With respect
to the various invoices which comprise this item, we note (as we
noted in Ruling 226826):
The first two sheets of the invoices for this item clearly
reflect repairs ("IGS Scrubber Repairs" is the heading for these
sheets and the work described reflects repairs); these items are
dutiable and are so reflected on the applicant's spreadsheet.
The next two sheets (pp. 484-485) contain the heading "IGS
Scrubber Modification." These sheets are superseded by the
following two sheets (pp. 486-487), which are headed "CHG' 433A.
01 I.G. Scrubber Mod. (W/A 150)," and which indicate that the
work on pp. 484-485 is cancelled and that the item is revised.
The revised item includes removing and disposing of filter beds,
spray pipes, and water supply lines; installing a sheet liner;
fabricating a quenching spool; bending a pipe; welding; cleaning;
installing grating and packing; fabricating new spray manifolds;
and connecting the sea water supply. The final sheet of this
invoice, which is headed "433B IGS Recirc, Modification" (p.
488), includes removing the recirculating piping from the
circulation valve to the scrubber; installing a blank flange; and
prefabricating new piping.
Thus, the invoice pages of item 433 which are at issue here
are pages 486-488.
The petitioner describes this item as "a modification
utilizing improved design [which] meets the criteria for
modification..."
The petitioner has submitted a letter to it dated May 9,
1996 from Charles M. McGinley, which states:
Confirming our phone conversation, the specifications and
resulting work on the Fredrikstad Inert Gas Scrubber (IGS)
System successfully improved performance by modifying the
adsorber trays to packed beds.
MASPAC FN90 tower packing provides the full advantages of
packed bed tower packings over the older tray type
internals, including operational advantages of lower
pressure drop and minimization of liquid foaming.
Upon a review of the documentary evidence, we conclude that
the costs of this item reflected on pages 486-488 are
nondutiable. No repairs are noted on these invoices, and the
work described appears to be consistent with the assertions of
the petition that these invoices reflect a nondutiable
modification.
Item 450 - Power/Water line maintenance. In Ruling 226826,
we stated as follows with respect to this item:
The invoice, as well as the applicant's statement, reflects
that this item is a maintenance item. Maintenance items are
dutiable pursuant to 19 U.S.C. 1466. In Ruling 111571 dated
March 4, 1992, we stated, in pertinent part:
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).
Accordingly, this item is dutiable. [End of excerpt from
Ruling 226826.]
The petitioner states:
We suggest that "maintenance" as used on the invoice is
misleading...The 180 degree roll over of the line, was not a
repair, in that it was not a replacement, reconditioning,
etc. of worn materials or parts. It was an action to extend
the life of the piping. See Headquarters Memorandum 108365
PH dated 12 Feb. 1987 reading in part "105(c) This item,
rotation of an inert gas pipe, about which you request our
advice, should not be dutiable because it is not a repair"
As the excerpt from Ruling 226826 states, supra, it is
Customs' position that maintenance operations are dutiable
pursuant to 19 U.S.C. 1466. Customs' position is based on
judicial guidance. See E.E. Kelly & Co., supra. The fact that
Memorandum 108365 found that the rotation of inert gas pipe
should not be dutiable because it is not a repair does not
persuade us that the subject item is not dutiable. We note that
Memorandum 226826 was not a Customs ruling, nor was it in ruling
format.
In Ruling 226737 dated March 12, 1996, where we found that
hull cleaning (including power washing and hand scraping marine
growth) was dutiable pursuant to 19 U.S.C. 1466, we thoroughly
discussed the dutiability of maintenance operations.
The petitioner states that this item "was an action to
extend the life of the piping." As such, it is a maintenance, or
preventive maintenance.
Item 450 is a maintenance item which is dutiable.
HOLDING:
As detailed supra, the petition is granted in part and
denied in part.
Sincerely,
Chief,
Entry and Carrier Rulings Branch