VES-13-18 CO:R:IT:C 112478 GFM
Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831
RE: Vessel Repair; Modification; Application; Segregation of
Costs; Inspection; Testing; Anchor Chains; Painting;
Transportation; Megger;Overhead; Survey; Protective Wood
Covering; Sea Trials; 19 U.S.C. 1466; M/V PRESIDENT
HOOVER; V-121; Entry No. 110-0104125-7.
Dear Sir:
This letter is in response to your memorandum dated
September 23, 1992, which forwards for our review the application
for relief filed in conjunction with the above-referenced vessel
repair entry.
FACTS:
The vessel PRESIDENT HOOVER arrived at the port of Seattle,
Washington, on January 24, 1992, and filed a timely vessel repair
entry. The entry indicates that the vessel underwent foreign
shipyard work at New Territories, Hong Kong, Yokohama, Japan and
Kaohsiung, Taiwan from November, 1991 to January, 1992. This
application seeks relief from duty for various charges incurred
during vessel's dockage at said foreign ports.
ISSUE:
Whether the cost of foreign shipyard work completed aboard
the subject vessel is dutiable pursuant to 19 U.S.C. 1466.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466(a), 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 the foreign or
coastwise trade, or vessels intended to be employed in such
trade.
ITEM 1.3-1 DOCKSIDE TRIALS
This item was initally submitted as a prospective drydocking
operation and was subsequently cancelled. Accordingly,
disposition is not required.
ITEM 1.3-2 SEA TRIALS..............................$ 4,600.00
This item contains a segregated charge for sea trial labor
and launch services. Applicant correctly states that the
dockside labor portion of this item is dutiable. Applicant also
correctly points out that the charges for launch services is non-
dutiable. Accordingly, only that portion of the item
attributable to sea trial labor ($ 4,325.00) is dutiable.
ITEM 2.1-7 ANCHOR CHAIN LOCKER.....................$ 21,965.00
This item involves operations undertaken pursuant to anchor
chain repairs and inspections.
It is well settled that 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 non-
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,
820/60, 51/61, 429/61; C.S.D. 2514 and T.D.s 45001 and 49531.
With regard to this item, although an inspection did take
place, it is clear that the ranging of the anchors was performed
in preparation for the admittedly dutiable repairs contained in
this item. Accordingly the charge for this item ($ 21,965.00) is
dutiable.
ITEM 3.1-1 H.P. WATER WASH FOR PAINTING............$ 77,370.00
This item involves charges for water-blasting of the hull
which was performed pursuant to repair operations and ABS
inspections. 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 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).
Both the invoice and the explanatory letter submitted by the
applicant clearly indicate that the high-pressure water washing
of the hull was performed in preparation of hull painting and
other dutiable maintenance operations. Thus, in accordance with
the cited authority, the cost of this item ($ 77,370.00) is fully
dutiable.
ITEM 3.1-2 WOODEN PROTECTIVE PANELS................$ 16,260.00
This item involves the erection of temporary plywood
protection of the deck and E.R. console to protect against
hazards of repair. In accordance with C.I.E. 543/62, duty
remission will not be granted for safety devices installed on a
vessel. Such costs are considered an additional expense of the
overall repairs and are thus dutiable.
ITEM 3.1-7 N.D.T. OUTBOUND CORNERS OF MAIN SCOOP...$ 2,630.00
According to the invoice description, the item involves
charges for "[c]arrying out magnetic particle inspection on
starboard side main scoop pipe aft. corner (Fr.101) and
submitting report to Owner's Representative." Applicant asserts
that this item amounts to a non-destructive inspection and is
thus non-dutiable.
With regard to this item, as it appears that no repairs were
undertaken pursuant to the inspection, the cost of the item
($ 2,630.00) is non-dutiable.
ITEM 3.1-10 OVERBOARD SPOOL PIPE CLEANING..........$ 5,060.00
This item involves charges for "[s]craping and cleaning up 2
section overboard pipe internal surface[s] for inspection in way
of stbd. after coolers." We note that this item is immediately
preceded on the invoice by two items relating to the "cropping,
renewing, and welding" of the spool pipe.
In C.I.E. 807/61, it was settled that chipping, scraping,
and wire-brushing which are related to repair operations are
dutiable incidents of repair.
Here, the invoice is unaccompanied by inspection
documentation. Given that fact, and the item presumptive
relation to the repair items mentioned, the cost of the item
($ 5,060.00) is fully dutiable.
ITEM 3.3-9 PORT SIDE BRIDGE WING...................$ 51,730.00
This item contains charges for the alleged removal and
replacement of parts for access which applicant claims should be
non-dutiable.
The numerous references to "renewing, repairing, and
scraping" compel us to consider this item a dutiable repair.
Accordingly, the entire cost of the item ($ 51,730.00) is
dutiable.
ITEM 3.3-11 STORE LOADING CRANE....................$ 34,720.00
This item involves the disconnection, loading and
transporting of the crane jib to the workshop for examination.
Applicant states that repairs were carried out under a separate
item. Applicant seeks to have these items considered non-
dutiable on the basis that they constitute transportation costs.
According to C.I.E. 1325/58, charges for transportation of
parts and materials between a vessel and a workshop are not
dutiable if itemized separately. Moreover, it is the position of
the Customs Service that "transportation" does not include
operations relative to preparing the item for shipping. Thus,
labor for such services as removing a part from its housing or
mounting, or disconnecting an item, etc., does not constitute
transportation and are thus, dutiable. See Headquarters Ruling
Letter 112211, June 30, 1992. With respect to the case at hand,
the invoice contains consolidated transportation charges and
includes charges for services which may not be included in
transportation costs. Accordingly, the entire cost of the items
($ 34,720.00) is dutiable.
ITEM 5.1-11 ENGINE ROOM FAN MOTORS.................$ 155,700.00
This item involves the repair of the engine room port and
starboard side fan motors. The invoice states that the motors
were disconnected and dismantled; parts were scraped and wire-
brushed, and parts were renewed and tested after repairs.
In accordance with previously cited authority, these
operation are clearly dutiable. Accordingly, the cost of this
item, minus the costs for staging ($ 145,460) is dutiable.
ITEM 5.1-13 GLAND EXHAUST MOTOR....................$ 4,565.00
This item contains charges for "disconnecting and removing
one off 3 HP electric motor to workshop, dismantling, cleaning
and checking for inspection, varnishing and baking, winding,
supplying and renewing one off ball bearing, renewing with
Owner's supplied one off ball bearing, reassembling, testing,
reshipping, refitting in same position, connecting up and testing
on completion." Applicant asserts that the charges included in
this item should be classified as non-dutiable incidents to a
required inspection.
Customs Service Decision 79-277 stated, "[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 and subsequent
rulings citing it, have been utilized by vessel owners seeking
relief not only from charges appearing on an ABS 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. 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, 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 are necessary.
Although the invoice indicates 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
(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 from
duty the cost of maintenance or repair work done by a shipyard in
preparation of a required survey. Nor does it exempt from duty
the cost of any testing by the shipyard to check the
effectiveness of repairs completed previous to, or found to be
necessary by reason of, the required survey.
With respect to this item, it is clear that it is a dutiable
transaction according to the above-cited authority. Accordingly,
the cost of the item ($ 4,565.00) is dutiable.
ITEM 5.1-30 MEGGER TESTING.........................$ 13,000.00
This item contains charges for "Megger testing of the ship's
electrical circuit[ry] and motors and submitting of test
reports."
It is apparent that this item is intended to cover charges
for repair operations without regard to their status. It is thus
true that megger readings were performed in conjunction with
dutiable repairs. Accordingly, as there is no segregation as to
which megger readings relate to non-dutiable work, pursuant to
C.I.E.s 1325/58, 565/55 and Headquarters Ruling Letter 109021,
dated October 22, 1987, the entire cost of this item
($ 13,000.00) is dutiable.
OVERHEAD CHARGES................................$ 1,217,145.00
The entry in question is accompanied by company-prepared
worksheets which include a column marked as "Duty Free Overhead @
HK $ 18.876 Per Man Hour" [sic]. It is reported that Customs
will be receiving eight other entries which can be expected to
include this cost category and we are asked to rule upon the
dutiable status of such "overhead" charges.
Customs has had occasion to consider the dutiability of so-
called "overhead" charges (see Customs Ruling 111170, February
21, 1991). In that ruling, we cited a published Treasury
Decision of long standing (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].
"Emoluments" as used in the cited decision would include all
wages, taxes, accounting fees, office space charges, inventory or
mark-up costs, purchasing costs, and management fees. Certainly,
general and unspecified "overhead" charges such as those included
in the entry under consideration must be considered dutiable.
CF 226 ITEM 4 VESSEL CLEANING......................$ 4,350.00
This item appears to involve vessel cleaning performed
pursuant to vessel repairs. Absent evidence to the contrary, the
cost of this item ($ 4,350.00) is dutiable.
HOLDING:
Following a thorough review of the evidence submitted as
well as analysis of the applicable law and precedents, we have
determined that the Application for Review should be allowed in
part and denied in part as set forth in the Law and Analysis
portion of this ruling.
Sincerely,
Acting Chief
Carrier Rulings Branch