VES 13-18 CO:R:IT:C 112066 GEV
Deputy Assistant Regional Commissioner
Commercial Operations Division
423 Canal Street
New Orleans, Louisiana 70130-2341
RE: Vessel Repair Entry No. C49-0021777-8; U.S. Parts;
Inspections; Maintenance; Cleaning; Scavenger Air Spaces;
M/V SAMUEL L. COBB; V-116
Dear Sir:
This letter is in response to your memorandum dated January
6, 1992, which forwards for our review and consideration the above-
referenced application for relief from duties assessed pursuant to
19 U.S.C. 1466. Our findings are set forth below.
FACTS:
The record reflects that the M/V SAMUEL L. COBB, a vessel
owned by Wilmington Trust Company and operated by Ocean
Shipholdings, Inc., arrived at the port of Guayanilla, Puerto Rico,
on August 13, 1991. Vessel repair entry number C49-0021777-8 was
filed on the same day as arrival indicating work performed on the
vessel in Singapore; Malta; Priolo, Sicily; Killingholme, United
Kingdom; Donges, France; and Tarragona, Spain.
An application for relief was timely filed on October 11,
1991. The areas under Customs Headquarters review consist of the
following:
1. Dasic Marine Invoice no. 7133 relating to parts that were
allegedly purchased in the United States.
2. Work performed pursuant to a vessel inspection.
3. Malta Invoice Item 2.4(MDD500) relating to the inspection
and polishing of the propeller.
4. Malta Invoice Item 6.1(MDD515F) relating to the cleaning
of the scavenge, piston spaces, and reed valves.
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5. Malta Invoice Item 6.1(MDD519J) relating to the cleaning
of internals after completion of work in crank case.
These above areas under Customs Headquarters review consist
of issues referred by the Vessel Repair Liquidation Unit and
include costs associated with post-repair cleaning (i.e., Malta
Invoice Item 6.1(MDD519J)). This latter issue is identical to an
issue currently in litigation, and is the subject of a letter from
the applicant in which it is stipulated that the applicant will not
further contest a Customs finding of dutiability. In light of this
factor, this item will be liquidated as dutiable and will not be
the subject of further consideration in this decision.
ISSUE:
Whether the costs for which the applicant seeks relief are
dutiable under 19 U.S.C. 1466.
LAW AND ANALYSIS:
Title 19, United States Code, 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.
1. Dasic Marine Invoice no. 7133 covers parts that were
allegedly purchased in the United States and shipped foreign for
installation. The applicant claims these parts should be accorded
duty-free treatment.
The Customs and Trade Act of 1990 (Pub. L. 101-382), which
amended 19 U.S.C. 1466, exempts from duty under the statute, the
cost of spare repair parts or materials which have been previously
imported into the United States as commodities with applicable duty
paid under the Harmonized Tariff Schedule of the United States
(HTSUS). The amendment specifies that the owner or master must
provide a certification that the materials were imported with the
intent that they be installed on a cargo vessel documented for and
engaged in the foreign or coasting trade.
The certification required by 19 U.S.C. 1466(h)(2) as to
the vessel's documentation (foreign or coasting trades) and
service, will be made by the master on the vessel repair entry (CF
226) at the time of arrival. The fact of payment of duty under the
HTSUS for a particular part must be evidenced as follows. In cases
in which the vessel operator or a related party has acted as the
importer of foreign materials, or where materials were imported at
the request of the vessel operator for later use by the operator,
the vessel repair entry will identify the port of entry and the
consumption entry number for each part
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installed on the ship which has not previously been entered on a
CF 226. In cases in which the vessel operator has purchased
imported materials from a third party in the United States, a bill
of sale for the materials shall constitute sufficient proof of
prior importation and HTSUS duty payment. This evidence of proof
of importation and payment of duty must be presented to escape duty
and any other applicable consequences.
In addition, we require certification on the CF 226 or an
accompanying document by a person with direct knowledge of the fact
that an article was imported for the purpose of either then-
existing or intended future installation on a company's vessels.
Ordinarily, the vessel's master would not have direct knowledge of
that fact, and an agent may also be without such knowledge.
Customs has in the past linked this duty remission provision
to the duty assessment provision in subsection (a) of the statute.
In the face of argument to the contrary we have held that a two-
part test must be met in order for remission of duty to be granted:
first, that the article must be of U.S. manufacture; and second,
it must be installed by a U.S. resident or regular vessel crew
labor. The reason for this position is that (d)(2) refers to "such
equipments or parts...", etc., without any other logical placement
for the word "such" occurring in that subsection. We inferred that
"such" articles must refer to those installed under subsection (a),
absent any other reasonable predication. The new amendment puts
this issue to rest; it is clear that as concerns foreign-made parts
imported for consumption and then installed on U.S. vessels abroad,
the labor required for their installation is separately dutiable.
A part may now be considered exempt from vessel repair duty albeit
the foreign labor cost is dutiable.
Uniform treatment will be accorded to parts sent from the
United States for use in vessel repairs abroad, regardless of
whether they are proven to be produced in the U.S., or have been
proven to have been imported and entered for consumption with duty
paid. In both cases, the cost of the materials is duty exempt and
only the cost of foreign labor necessary to install them is subject
to duty. Crew member or U.S.-resident labor continues to be free
of duty when warranted.
The effective date of this amendment makes this section
applicable to any entry made before the date of enactment of this
Act that is not "finally liquidated" (i.e., for which a timely
protest was filed or court action initiated) on the date of
enactment of this Act, and any entry made--
(A) on or after the date of enactment of this
Act, and
(B) on or before December 31, 1992
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Since the subject entry has not been "finally liquidated" as
noted above, the new 1466(h)is applicable to this entry as it
relates to spare parts.
In regard to the documentation submitted with this
application, we find that the subject parts were purchased and
installed on the vessel in May 1991. The invoice submitted
(Exhibit 1) indicates that Dasic Marine is not a third party in
the United States as discussed above but rather was the direct
purchaser of these parts; therefore, a bill of sale is not
sufficient proof of prior importation and HTSUS duty payment. We
further find that the application does not contain evidence of a
consumption entry number for each part installed and the name of
the U.S. port of importation. In addition, the documentation is
contradictory inasmuch as the invoice clearly indicates a foreign
purchase with payment going to a foreign entity yet the applicant
has obtained a letter (Exhibit 1a) from the U.S. affiliate of the
foreign vendor which states that the foreign invoice represents a
U.S. purchase and has certified that the parts in question were
purchased in the United States (Exhibit 1b). Accordingly, in view
of the above, we find that the parts listed on the Dasic Marine
Invoice are dutiable.
2. Shipyard "Inspection" Costs.
In regard to the dutiability of inspection/survey costs, we
note that C.S.D. 79-277 stated that, "[i]f the survey was
undertaken to meet the specific requirements of a governmental
entity, classification society, insurance carrier, etc., the cost
is not dutiable even if dutiable repairs were effected as a result
of the survey."
With increasing frequency, this ruling has been utilized by
vessel owners seeking relief not only from charges appearing on an
American Bureau of Shipping (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.
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(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 such a 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 ABS). 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.
3. Malta Invoice Item 2.4(MDD500) relating to the inspection
and polishing of the propeller and claimed to be a non-dutiable
cleaning.
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- 6 -
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 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).
Most recently, 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. 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.
In regard to the work involving the propeller listed under
Malta Invoice Item 2.4(MDD500), we concur with the applicant that
it was not done as part of, in preparation for, or in conjunction
with dutiable repairs. The work consisted only of those activities
necessary for removal of the propeller for inspection and placing
it back on the shaft. The invoice did not indicate that the
polishing involved was pursuant to the propeller's restoration.
(see Customs Ruling 112755, dated June 22, 1993) Accordingly, we
find the cost of this item to be non-dutiable.
4. Malta Invoice Item 6.1(MDD515F) relating to the cleaning
of the scavenge, piston spaces, and reed valves.
We are not in accord with the applicant regarding the work
specified under this particular item. As stated in our previous
rulings the collection of carbon and oil deposits results in a
deterioration--as manifested in the safety and efficiency problems-
-of the air scavenger spaces that may only be corrected by cleaning
the air scavenger spaces. See generally Headquarters Ruling Letter
111700, dated November 19, 1991. We therefore - 7 -
reaffirm our position that cleaning air scavenger spaces is a
maintenance operation that is subject to duty under 19 U.S.C.
1466. Accordingly, Malta Invoice Item 6.1(MDD515F) is dutiable.
HOLDING:
The costs for which the applicant seeks relief are dutiable
in part under 19 U.S.C. 1466 as discussed in the Law and Analysis
portion of this ruling.
Sincerely,
Arthur P. Schifflin
Chief
Carrier Rulings Branch