VES-13-18 CO:R:IT:C 112045
Deputy Assistant Regional Commissioner
Classification and Value Division
ATTN: Regional Vessel Repair Liquidation Unit
New York, New York 10048-0945
RE: Vessel Repair; 19 U.S.C. 1466; Application for Relief;
Vessel Repair Entry No. 514-3004541-2; S/S RESOLUTE V-43
Dear Sir:
This letter is in response to your memorandum of December
13, 1991, which forwards for our consideration the above-
referenced Application for Relief from the assessment of vessel
repair duties submitted by Farrell Lines Inc.
FACTS:
The record reflects that the subject vessel, the S/S
RESOLUTE, arrived at Elizabeth, New Jersey, on July 30, 1991.
Vessel repair entry, number 514-3004541-2, was filed on August 1,
1991, indicating work performed on the vessel at Valletta, Malta.
The vessel owner was granted a 30 day extension to file an
application for relief, which was subsequently filed on October
8, 1991. We are asked to review the dutiability of the following
items:
Part I
Drydocking and General Services
Part II
Tests, Inspections, and Surveys: Items 3, 13, and 18. We also
review the dutiability of items 4, and 12.
Part III
Repairs: Items 26, 29, 49, 50, 107, 115, and 118.
ABS Surveys: (a) Drydocking Survey, (c) Port Boiler Survey, and
(d) Starboard Boiler Survey
ISSUE:
Whether the foreign work performed on the subject vessel for
which the applicant seeks relief is dutiable under 19 U.S.C. 1466.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides in
pertinent part for payment of duty in the amount of 50 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 engage in such trade.
Part I
Drydocking and General Services
In the case of United States v. George Hall Coal Co., 134 F.
1003 (1905), it was held that any of various types of expenses
associated with foreign shipyard operations are classifiably free
from the assessment of duty, regardless of the character of the
overall shipyard work (repair vs. modification). The case found
that the expense of drydocking a vessel is not a repair cost.
Drydocking is not an isolated expense, and is commonly associated
with numerous others. These may include, but are not limited to,
sea water supply (for firefighting capability), fresh water
supply, hose hook-up and disconnection, fire watch services,
shore power hook-up, etc.
Further, pursuant to CD 1836 charges for drydocking, for
furnishing electricity, air and water, fees paid for the use of
tugs and pilots in drydocking and undocking a vessel, and crane
expenses are not dutiable repairs if segregated on the invoice.
The various drydocking and general services costs of items 1 and
2(a) - (v), in the amount of $87,798, are therefore not dutiable.
However, the cost of obtaining a gas free certificate constitutes
an ordinary and necessary expense incident to repair operations
and is accordingly dutiable. C.I.E. 1188/60. The charge,
though, 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.
Part II (tests, inspections, and surveys) and the ABS Surveys
{(a) Drydocking Survey, (c) Port Boiler Survey, (d) Starboard
Boiler Survey} involve similar issues and will be discussed
together.
Certain vessel inspection operations are generally
considered non-dutiable. Where periodic surveys are undertaken
to meet the specific requirements of, for example, a
classification society or insurance carrier, the cost of the
surveys is not dutiable even when dutiable repairs are effected
as a result thereof. C.S.D. 79-277. With increasing frequency,
this ruling has been utilized by vessel owners seeking relief not
only from charges appearing on an ABS or U.S. Coast Guard invoice
(the actual cost of the inspection), but also as a rationale for
granting non-dutiability to a host of inspection-related charges
appearing on a shipyard invoice. In light of this continuing
trend, we offer the following clarification.
C.S.D. 79-277 discussed the dutiability of certain charges
incurred while the vessel underwent biennial U.S. Coast Guard
and ABS surveys. That case involved the following charges:
ITEM 29
(a) Crane open for inspection.
(b) Crane removed and taken to shop. Crane hob and
hydraulic unit dismantled and cleaned.
(c) Hydraulic unit checked for defects, OK.
Sundry jointings of a vessel's spare
renewed.
(d) Parts for job repaired or renewed.
(e) Parts reassembled, taken back aboard ship
and installed and tested.
In conjunction with the items listed above, we held 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 the survey. We also held that 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 (emphasis
added).
It is important to note that only the cost of opening the
crane was exempted from duty by reason of the specific
requirements of the U.S. Coast Guard and the ABS. The
dismantling and cleaning of the crane hob and hydraulic unit was
held dutiable as a necessary prelude to repairs. Moreover, the
testing of the hydraulic unit for defects was also found dutiable
as a survey conducted to ascertain whether repairs were
necessary. Although the invoice indicated that the hydraulic
unit was "OK," certain related parts and jointings were either
repaired or renewed. Therefore, the cost of the testing was
dutiable.
We emphasize that the holding exempts from duty only the
cost of a required scheduled inspection by a qualifying entity
(such as the U.S. Coast Guard or the American Bureau of
Shipping). In the liquidation process, Customs should go beyond
the mere labels of "continuous" or "ongoing" before deciding
whether a part of an ongoing maintenance and repair program
labelled "continuous" or "ongoing" is dutiable.
Moreover, we note that C.S.D. 79-277 does not exempt repair
work done by a shipyard in preparation of a required survey from
duty. Nor does it exempt from duty the cost of any testing by
the shipyard to check the effectiveness of repairs found to be
necessary by reason of the required survey.
Turning to the case before us, upon careful review of the
ABS surveys, particularly the drydock, port boiler, and
starboard boiler surveys, it appears that the surveys are
periodic surveys undertaken to meet the specific requirements of
the classification society. The costs associated with item 3
(rudder pintle and stock) and item 18 (boiler examination)
involve opening these areas for inspection purposes. We find
that although repair work to these areas was performed, the
repair and inspection costs of the repairs are properly
segregated from the periodic inspection costs; therefore, item 3,
item 18, and the drydock, port boiler, and starboard boiler
surveys are non-dutiable. (The ABS surveys of the "repair to
port and starboard boilers" and "repair to H.P. turbine steam
nozzle chest" are dutiable).
The applicant contends that item 4 ("tailshaft
examination"), and item 12 (propeller polishing), constitute
costs associated with a nondutiable periodic survey pursuant to
ABS requirements. 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 (See C.I.E. 429/61).
Customs has long held 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, 429/61; 569/62, 698/62; C.D. 2514; T.D.'s 45001
and 49531. Pursuant to C.I.E. 919/60 remission of duty assessed
on the cost or repairs is not warranted under section 1466 where
the repairs are maintenance in nature.
In T.D. 43322 which discussed the dutiability of maintenance
painting, the court stated:
It is a matter of common knowledge that the words
"maintain" and "maintenance" are frequently used in the
sense of keeping a thing in good condition by means of
"repairs". For example, to maintain a highway,
ordinarily, means to keep it in a proper state of
repair. Obviously, "maintenance," whether used in
connection with a ship or other thing, means to keep or
preserve in a good condition. This may, and frequently
does, involve the making of repairs.
Accordingly, we find that the work performed in item 4 and item
12 goes beyond mere cleaning operations, and constitutes
maintenance; therefore, items 4 and 12 are dutiable. Item 13
(boiler cleaning) is also dutiable. By the fact that dutiable
repairs to the boiler occurred, the cleaning done beforehand was
clearly in preparation of, and an integral part of the repairs
that followed.
Part III
Repairs
Pursuant to C.D. 1830 examinations, inspections and cleaning
which involve no dutiable elements, to include repair or
maintenance, are not dutiable. Accordingly, we agree with the
applicant that items 49, 50, 107, 115, and 118 listed on Malta
invoice No. 003354, which solely involved cleaning operations not
performed in conjunction with dutiable repairs, are non-dutiable.
Customs has consistently held that transportation charges of
parts, equipment, or machinery to and from the job are not
dutiable as expenses of repairs, if properly segregated from the
repair charges. C.D. 1836; C.I.E. 204/60; C.I.E. 518/63; C.I.E.
1325/58. Further, as a general rule, the cost of erecting and
removing staging is not subject to duty. Headquarters Ruling
Letter 106827, dated July 19, 1984. Because the cost for the
transport of parts and staging is segregated from the repairs
conducted, all such costs, with the exception of items 26 and 29,
are not dutiable.
Pursuant to C.I.E. 1325/58 and C.I.E. 565/55, duties may not
be remitted where the invoice does not segregate the dutiable
costs. Because items 26 and 29 only list costs for
transportation and staging, and not for the repairs performed, we
find that these costs are not properly segregated, and therefore
the entire item is dutiable.
HOLDING:
The costs for drydocking and general services under Part I
are non-dutiable. Under Part II and the ABS Surveys, the costs
of item 3, item 18, and the drydocking, port boiler, and
starboard boiler surveys are non-dutiable because the repair and
inspection costs of the repairs relating to these areas are
properly segregated. Item 13 is dutiable as cleaning done
integral to repairs. Items 4 and 12 are dutiable because the
operations conducted constitute maintenance. Under Part III,
items 49, 50, 107, 115, and 118 are non-dutiable as cleaning
operations not involving repairs. Staging and transportation
costs are non-dutiable, except where not properly segregated
(items 26 and 29).
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch