VES-13-18-CO:R:IT:C 112146 MLR
Deputy Assistant Regional Commissioner
Commercial Operations
423 Canal Street
New Orleans, Louisiana 70130-2341
RE: Vessel Repair; 19 U.S.C. 1466; Vessel Repair Entry No.
C53-0012156-9; Invoice Summarization; Equipment; Petition
for Review; S/S COASTAL EAGLE POINT V-5
Dear Sir:
This is in response to your memorandum of March 9, 1992,
regarding the petition for review of HQ 111325, submitted by
Sharon Steele Doyle, Givens & Kelly, on behalf of Coscol Marine
Corp.
FACTS:
The record reflects that the subject vessel, the S/S COASTAL
EAGLE POINT, arrived at the port of Houston, Texas, on June 2,
1990. Vessel repair entry, number C53-0012156-9, was filed
timely indicating work performed on the vessel in England.
An application for relief (HQ 111325) was filed on August
31, 1990, after an extension was granted. That decision held
all items in the A & P Appledore (Falmouth) Ltd. Repair Account
Invoice no. 769/471 (hereinafter A & P) dutiable because the item
descriptions did not adequately detail the costs.
The installation of a Skanti/Sait communications unit was
dutiable equipment because no evidence was presented to show that
the unit would permanently remain on board. Also, in the Mackay
communications work orders it appeared as if some of the costs
for certain items were missing. Further, mileage was held to be
dutiable absent an explanation why freight was also included.
HQ 111325 also addressed two receipts from Lloyds Bank for
"masters cash"; it was unclear if the charge was related to a
repair.
The Vessel Repair Liquidation Unit granted an extension
until October 11, 1991, to file a petition for review. During
the course of a meeting at Customs Headquarters on September 5,
1991, the Carrier Rulings Branch granted an extension until
December 11, 1991. The record reflects that apparently another
extension was granted until January 31, 1992. A petition for
review was filed January 31, 1992.
We are asked to review:
I. A revised invoice from A & P which segregates the cost
items;
II. all items on the A & P invoice pertaining to periodic
inspections and the cleaning for period inspections;
III. whether a Skanti/Sait communications unit is dutiable
equipment, or a permanently installed addition; and
IV. two Lloyds Bank receipts for "masters cash".
ISSUE:
Whether the foreign work performed on the subject vessel for
which the petitioner seeks review 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.
I. A & P Revised Invoice
We are reluctant to accept an entirely new A & P invoice.
It appears that the original invoice was done on a computer
(since the invoice seems to have been printed by a dot matrix
printer) and the replacement invoice appears to have been
typewritten. We will accept the replacement invoice, but we
would be interested to know how long the shipyard stores its
computer invoice files.
Also, we note that the cost items, originally placed
together at the end of the entire item description, are now only
separated and placed after a relevant line description. Some
items, the dutiability of which are not in dispute, have only
been reshuffled. For example, Item 52 had two paragraphs of
description with five line item costs following the description
(i.e., material, cranage, transport, cleaning, and repairs). Now
the replacement invoice contains the same two paragraphs of
description with the line items "material", and "labour for
repairs" following the description. Following these two line
items is a heading entitled "Additional Services provided" with
"cranage", "transport", and "cleaning" underneath. In actuality,
a transport and cleaning cost should have been placed after the
first paragraph which described the transport and the cleaning of
the fan and motor in question.
It would have been more helpful if a cost was listed for
each line description, allowing Customs to determine its
dutiability, rather than lumping the costs together and
categorizing it for Customs.
II. A & P Invoice Periodic Inspections and Cleaning for Period
Inspections
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 A.B.S. or 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.
C.S.D. 79-277 discussed the dutiability of certain charges
incurred while the vessel underwent biennial U.S. Coast Guard
and A.B.S. 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.
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 A.B.S. 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, the petitioner contends that
certain costs listed on the A & P invoice as "periodic
inspection" and "cleaning for periodic inspection" are non-
dutiable.
Item 16 - Sea Chest/Strainers. In the original invoice the
work pertaining to this item was described with the costs for
this item listed beneath and categorized to reflect Customs duty
(i.e., periodic inspection, cleaning for periodic inspection,
staging, materials, repairs). The replacement invoice now shows
the same description and costs, but the costs are placed after a
description of work:
Removed mud deposits washed, cleaned and pumped out bow
thrust compartments.
Periodic inspection........................2900.00
Cleaning for periodic inspection...........2100.00
While this may reflect more accurately how the costs were
incurred, the fact remains that repair operations described later
(i.e., painting) still were conducted. By the fact that the area
was painted, the cleaning done beforehand was clearly in
preparation of, and an integral part of the repairs. Obviously,
the area must be clean to allow inspection, but it also must be
clean to be painted. Examination, inspections and cleaning which
involve no dutiable elements, to include repair or maintenance,
are the only instances in which they are not dutiable. C.D.
1830 (emphasis added).
Further, the petitioner claims that the cost of "periodic
inspection" is non-dutiable. This cost was paid to the shipyard,
not to the A.B.S. or Coast Guard. We emphasize that only
inspection costs paid to a classification society or insurance
carrier to meet the specific requirements of a survey are non-
dutiable. Therefore, the "periodic inspection" and "cleaning for
periodic inspections" costs are dutiable.
Item 17 - Sea Valves. This item now shows a "periodic
inspection" cost in the amount of $6233, and a "cleaning for
periodic inspection" cost in the amount of $1540 listed after the
relevant operations conducted: "Opened up cleaned, overhauled
nominated sea valves, presented for examination by USCG Inspector
and A.B.S. Surveyor and closed up on completion using Owners
jointings, packings, etc." Again, only a periodic inspection
cost paid to a classification society for a required survey is
non-dutiable; therefore, this cost is dutiable. Also, because
the description shows that the sea valves were "overhauled", the
cleaning was performed in preparation of this repair. Had the
petitioner showed a cost only for "opening" the sea valves, this
cost would have been non-dutiable.
Item 18 - Rudder Assembly. The costs for "cleaning for
periodic inspection" and "periodic inspection" are dutiable for
the same reasons as item 17 above. The description under
"additional work" of this item shows that repairs were
conducted.
Item 19 - Tailshaft Survey. Both costs are dutiable. The
A.B.S. Report states that repairs were performed to the
tailshaft.
Item 20 - Propeller Polishing. Both costs are dutiable.
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. 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 propeller polishing goes beyond mere
cleaning operations, and constitutes dutiable maintenance.
Item 22 - Anchors. Both costs are dutiable. The invoice
shows that the anchors were coated and that repairs were
conducted. The A.B.S. Report states that the chain locker and
anchor chain cables were badly worn and renewed and that three
badly worn links were cropped out.
Item 26 - Port and Stbd Boiler Handhole Plates/Drum
Manholes. Both costs are dutiable (126 hand hole joints were
renewed).
Item 27 - Boiler Main Stop Valves. Both costs are dutiable
(machined out existing seat, and shrunk fitted owners new 6" dia
seat).
Item 43 - Throttle Valve. Both costs are dutiable (carried
out repairs to M.E. ahead throttle valve as directed by owners
representatives). Further, the A.B.S. Report credits the survey
of this item towards the special continuous survey of machinery
and electrical equipment, indicating that the inspection of this
item was not solely conducted to satisfy the requirements of the
A.B.S., but was convenient for the vessel operators to check the
effectiveness of the repairs.
Item 54 - Air Ejector. Both costs are dutiable (repairs
were conducted upon the pumps and then inspected).
III. Skanti/Sait Communications Unit
HQ 111325 denied relief for the cost of the installation of
a Skanti/Sait communications unit, stating:
...in the absence of evidence that it would remain on board
the subject vessel were the subject vessel laid up for an
extended period of time, the communications equipment in
question is considered to be vessel equipment and, as such,
the cost of its installation is dutiable.
The costs relating to the installation are item 108, A & P
invoice; Sait invoice 403952; and Mackay Communications invoice.
Petitioner has submitted a letter {exhibit 4(g)(1)} from EB
Communications which explains the costs on the Sait Marine
Invoice, since we questioned why mileage and freight were both
included. We accept this explanation and hold the following
costs non-dutiable:
Travel Time to Site 768.00
Site Labour 432.00
Mileage and Bridge Toll 399.00
Forwarding or Parts 30.50
HQ 111325 stated that the Mackay Communications work orders
were inconclusive regarding the cost of certain merchandise
utilized in the installation. Now petitioner submits the bill
showing that the amount paid to Mackay is the same amount
appearing on the work order.
For purposes of section 1466, dutiable equipment has been
defined as:
...portable articles necessary or appropriate for the
navigation, operation, or maintenance of a vessel, but
not permanently incorporated in or permanently attached
to its hull or propelling machinery, and not
constituting consumable supplies. United States v.
Admiral Oriental Line et al., T.D. 44359 (1930)
{quoting T.D. 34150, (1914)}.
A more contemporary working definition of equipment might be that
which is used under certain circumstances by the Coast Guard; it
includes a system, accessory, component or appurtenance of a
vessel. This would include navigational, radio, safety and
ordinarily, propulsion machinery.
To prove that the communications unit is a permanent
addition to the vessel, the petitioner has submitted a letter
from Mackay Communications {exhibit 17(1)} which states: "This
radio equipment is a permanent part of the vessel and will not be
removed in the event the ship is put in lay-up." The letter
also states that the SKANTI TRP-8258 SSB Radiotelephone was
installed to upgrade the vessel for compliance with the new
Global Maritime Distress & Safety System. (Emphasis added).
In HQ 109936 we determined that a satellite communications
system was a non-dutiable permanent addition to the fittings of
the vessel. However, in that case, three letters from three
different enterprises were presented to show that not only was
the system designed for permanent installation and was left on
board during lay-up, but specific examples of other vessels were
cited to show that the system did, in fact, remain on board when
they were in lay-up for an extended period of time. In light of
the fact that we have consistently held that such delicate
electronic equipment is dutiable, additional evidence, citing
examples, would be useful. Therefore, we must deny petitioner's
claim at this time.
IV. Lloyds Bank
HQ 111325 also considered two receipts from Lloyds Bank,
questioning whether the amount for "masters cash" related to a
repair. Petitioner has submitted the masters cash accounts
{exhibits 4(q)(1) and 4(q)(2)} which show the receipt of the cash
from the agent and its distribution to the crew. Accordingly, we
hold the Lloyds Bank receipts non-dutiable.
HOLDING:
All costs listed on the A & P invoice as "periodic
inspection" and "cleaning for periodic inspection" are dutiable.
The evidence to show that the communications unit would
permanently remain on board is not sufficient. The evidence
presented to show that masters cash is not related to any repairs
is sufficient.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch