VES-13-18 CO:R:IT:C 112442 JBW
Deputy Regional Director
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831
RE: Vessel Repair; Anchor Chain; Casualty; Volcanic Ash; Fire
Damage; Overhead; 19 U.S.C. 1466; PRESIDENT MADISON; Entry
No. 110-0104113-3.
Dear Sir:
This letter is in response to your memorandum that forwards
for our review and ruling the petition for review filed in
conjunction with the above-referenced vessel repair entry.
FACTS:
The record reflects that the subject vessel, the PRESIDENT
MADISON, arrived at the port of Seattle, Washington, on August 23,
1991. A timely vessel repair entry, number 110-0104113-3, was
filed on August 30, 1991. The entry indicates that the vessel
underwent foreign shipyard work while in Hong Kong. An application
for relief was filed in which the vessel operator sought relief for
repairs to damage caused by volcanic ash from the Mount Pinatubo
eruption. This claim for relief was denied, for the entry was
filed for repairs made during a voyage subsequent to the voyage
during which the vessel experienced the casualty. Further, relief
was denied for repairs made to the main switch board, which caught
fire while the vessel was in dry dock. At the time of the
application, the cause of the fire was not established; the
petitioner has now supplied an explanation for the cause of the
fire. Finally, the petitioner seeks relief for the inspection of
anchor chains and for overhead costs.
ISSUES:
(1) Whether cleaning and inspecting the anchor chains are
dutiable operations.
(2) Whether damages to the vessel resulting from the volcanic
ash and the switchboard fire are remissible casualties.
(3) Whether certain foreign shipyard costs, including
clerical or other overhead charges, are subject to duty.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides in
pertinent part for payment of an ad valorem duty of fifty percent
of the cost of foreign repairs to or equipment purchased for a
vessel documented under the laws of the United States to engage in
the foreign or coastwise trade.
I. Cleaning and Inspection of Anchor Chains.
Hongkong United Drydock invoice item number 2.1-5 provides as
follows:
Anchor Chains - ABS/USCG Inspection
Ranging out anchor & cables, hosing clean by
high pressure salt water, reversing &
calibrating cables, hammer testing all links
marking cable shackles with paint and seizing
wire, restowing wire to chain locker.
Labour: 160 hrs
Material: $800 13,600.00
In the application, we determined that the cost of painting
marks on the anchor chains is a repair that is subject to duty and
that the entire invoice cost is subject to duty.
The petitioner has now segregated this invoice by
distinguishing between the costs for ranging/inspecting and
marking/seizing. The petitioner did not attribute the cleaning
costs, and we assume that the costs for the cleaning described in
the invoice are contained in the ranging/inspecting category. 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
cleaning performed was in part for the marking/seizing of the
anchor chains, which is a dutiable repair. The cost for ranging
and inspecting the anchor chains is therefore subject to duty.
II. Remission of Duties for Repairs to Correct
Damages Resulting from Volcanic Ash and Fire.
The vessel repair statute provides for the remission of the
duties in those instances where good and sufficient evidence is
furnished to show that foreign repairs were compelled by "stress
of weather or other casualty" and were necessary to secure the
safety and seaworthiness of the vessel to enable her to reach her
port of destination. 19 U.S.C. 1466(d)(1). The Customs Service
has interpreted the term casualty, as it is used in the vessel
repair statute, to denote an occurrence that, like stress of
weather, comes with unexpected force or violence, such as fire,
explosion, or collision. See Dollar Steamship Lines, Inc. v.
United States, 5 Cust. Ct. 23, 29, C.D. 362 (1940). An explosion,
however, does not result in an automatic determination of casualty.
The Customs Service assumes that such an occurrence is a casualty
unless the cause of the occurrence is attributable to normal wear
and tear or to improper maintenance. C.S.D. 79-283, 13 Cust. B.
& Dec. 44, 45 (1979); T.D. 55670(2), 97 Treas. Dec. 524 (1962).
This office has previously held that foreign repairs to this
vessel resulting from the Mount Pinatubo volcano were compelled by
casualty. Headquarters Ruling Letter 111879, dated January 24,
1992. We denied the application because the entry under
consideration was filed for repairs made during a voyage subsequent
to the voyage during which the vessel experienced the casualty.
The petitioner contends that the damage caused by the volcanic
ash occurred after the vessel had called in the United States and
commenced the subject voyage. The petitioner claims that the
vessel did not bypass United States shipyards and that the vessel
was in a seaworthy condition when it left the United States.
Finally, the petitioner cites rulings in which the Customs Service
remitted duties for repairs that were deferred to subsequent
voyages where the delays were adequately explained. C.I.E. 538/62,
dated May 22, 1962.
We agree with the petitioner that the Customs Service, under
certain circumstances, will permit casualty repairs to be made on
subsequent voyages if the delay is adequately explained. Id. In
the case cited by the petitioner, the vessel sustained damage to
its propeller and rudder; repairs were made during a subsequent
voyage. The Customs Service denied the vessel operator's claim
for relief and stated: "[W]e have never allowed relief merely on
the grounds that the damage or severity of the damage, said to have
been sustained in one voyage, was not discovered before the voyage
terminated." Id.
The petitioner contends that the damage that was repaired only
developed after the vessel left the United States en route to its
scheduled drydocking in Hong Kong. The petitioner, however, fails
to cite any specific problems that developed during the course of
the subject voyage. Rather, the work to correct the volcanic ash
damage appears to be general in nature. Moreover, statements made
by the petitioner in the application for relief filed for this
entry indicate that the work to repair the volcanic ash damage was
deferred, thus suggesting that the repairs could have been
performed in the United States. The vessel operator chose for
commercial reasons to have the vessel repaired in a foreign
shipyard:
Without resorting to the unprecident [sic]
event of taking the vessel out of service for
an extended period of time, the repairs were
deferred to the pending drydock availability
.... To do otherwise would have been
detrimental to the entire commercial operation
of the vessel and would have resulted in
unacceptable loss of revenue.
This explanation is insufficient to justify the remission of
duties.
While in dry dock, a fire started in the group control panel
"B" of the main engine room; at the time the application for relief
was filed, the cause of the fire was still under investigation.
As described, the fire affected twelve motor controllers for vital
equipment including the fuel oil service pump, the main air
compressor, the control air compressor, the vacuum pump, the air
conditioning compressor, and the domestic reefer compressor. The
Customs Service has held that a fire that starts as a result of a
short circuit in an electric motor because of lack of proper
maintenance or wear and tear does not constitute a casualty.
C.I.E. 777/62, dated August 1, 1962. However, unless it is
established by the evidence that a fire was caused by the poor
condition of the vessel, it should be assumed that the fire is the
result of a casualty. ORR Ruling 511-70, dated March 6, 1970.
In the application for relief, we concluded that based on the
evidence before us, we could not determine whether the fire was
caused by improper maintenance. The investigation into the cause
of the fire, which was incomplete at the time the application was
filed, indicates the fire likely resulted from the ignition of
flammable solvents that were used to clean the switchboard. This
evidence establishes that the fire was not caused by the poor
condition of the vessel. Duties for the repair of the fire damage
may therefore be remitted.
III.Overhead Charges.
The petitioner has submitted a cost breakdown for general
services performed at the shipyard that are said to represent non-
productive overhead charges. These charges include, inter alia,
clerical services, electronic data processing, accounting, etc.
Such charges have been found to be dutiable pursuant to T.D.
55005(3), December 21, 1959, wherein it was determined that:
Taxes paid on emoluments received by third parties
for services rendered...and premiums paid on workmen's
compensation insurance, are not charges or fees within
the contemplation of the decision of the Customs Court,
International Navigation Company v. United States, 38
USCR 5, CD 1836, and are therefore subject to duty as
components of the cost of repairs under [section 1466].
Customs has held the term "emoluments" as used in the cited
decision to include all wages, taxes, accounting fees, office space
charges, inventory or mark-up costs, purchasing costs, and
management fees. Consequently, general and unspecified "overhead"
and/or "administrative" charges, or charges including those listed
above, are considered dutiable.
It has been brought to our attention that Customs has
previously held charges for clerical services, electronic data
processing, accounting, insurance, general administration,
education and corporate expense to be analogous to the costs of
dry-docking and general services (which are non-dutiable pursuant
to C.I.E. 1188/60) and therefore non-dutiable (see rulings 108953
and 109308).
Upon further review of this matter, we are of the opinion that
our interpretation of T.D. 55005(3) as discussed above is correct.
Accordingly, we hold that the costs of "overhead" and/or
"administrative" charges are dutiable in their entirety when such
charges are associated with dutiable work or when such charges are
not apportioned between dutiable and non-dutiable work. Certain
clerical charges for which the petitioner seeks relief are
associated with dutiable work. Those overhead charges that are
related to dutiable repair operations are subject to duty under 19
U.S.C. 1466.
HOLDING:
Following a thorough review of the facts in this case as well
as an analysis of the law and applicable precedents that bear upon
those facts, we have determined that the Petition for Review should
be granted in part and denied in part for the reasons set forth in
the Law and Analysis section of this ruling. The petitioner should be informed of the right to file a Protest
following liquidation of this entry, as evidenced by the posting
of the bulletin notice of liquidation.
Sincerely,
Stuart P. Seidel
Director, International Trade