VES-13-18 CO:R:IT:C 112480 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; Drydocking Charges; Anchor Chains;
Propeller; Transportation; Overhead; 19 U.S.C. 1466;
M/V PRESIDENT GRANT; V-20; Entry No. 110-0104128-1.
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 GRANT arrived at the port of Seattle,
Washington, on February 14, 1992, and filed a timely vessel repair
entry. The entry indicates that the vessel underwent foreign
shipyard work in Taiwan and Hong Kong during January and February of
1992. This application seeks relief from duty for various
inspection, cleaning, repair, and modification charges incurred
during vessel's dockage at said foreign shipyards.
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 1.1-1.3-2 GENERAL SERVICES.......................$ 353,050.00
These items represent charges for shore power, temporary
lighting, telephone service, fire precaution, gas free certificate,
crane service, handling charges, foot lift, supports, general
cleaning, compressed air, fresh water, sanitary overboards, garbage
removal, line handlers, tugs, engine room bilge, temporary
generators, hook up and disc, generator labor, layberth, owner's
spare parts, dockside trial, sea trial, attendance labor, and launch
services which were all incurred relative to the drydocking of the
vessel.
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.
Moreover, under the rationale provided by a long-standing
published ruling (C.I.E. 1188/60) the cost of obtaining a gas free
certification, a necessary precursor to the initiation of any hot
work (welding) which may be necessary, constitutes an ordinary
dutiable expense which is associated with repair operations. In
liquidating such an expense, however, its cost is apportioned
between those items which are remissible and those which remain
subject to duty.
Accordingly, pursuant to the above authority, the charges
associated with this item, insofar as they relate to the drydock
operations exclusively, are non-dutiable.
ITEM 2.1-1-2.1-5 DRYDOCKING/INSPECTION................$ 206,728.00
These items represent charges for general drydocking and
related inspections. Pursuant to the authority stated above,
drydocking charges are non dutiable. With regard to periodic
surveys undertaken to meet the specific requirements of a
classification society, insurance carrier, etc., their cost is not
dutiable even when dutiable repairs are effected as a result
thereof; however, in the liquidation process Customs should go
beyond mere labels such as "continuous" or "ongoing" before deciding
whether an item is dutiable. If an inspection or survey is
conducted as a part of an ongoing maintenance and repair program,
regardless of how it is labelled, the cost thereof is dutiable.
Also, if the survey is to ascertain the extent of damage sustained,
or to ascertain if the work is adequately completed, the costs are
dutiable as part of the repairs which are accomplished pursuant to
the holdings in C.I.E. 429/61, C.S.D. 79-2, and C.S.D. 79-277.
In the present case, it appears that the drydocking inspection
is unrelated to repairs. Accordingly, it is not subject to duty.
ITEM 2.1-7 ANCHOR CHAINS/LOCKER......................$ 40,030.00
This item involves charges related to the inspection and
painting of the anchor chains pursuant to American Bureau of
Shipping and United States Coast Guard requirements. 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.
The exact nature of the item in question and the circumstances
surrounding it are unclear from the evidence submitted. The ABS
inspection reports indicate that repairs to the anchor were
effected. Additionally, the anchor was painted. In light of these
repair elements, it is not clear whether the inspection was
accomplished to ascertain the effectiveness of repairs or whether
the repairs were a result of the inspection. In any event, in
accordance with C.S.D. 79-277, we hold these items to be dutiable
incidents to repair absent credible evidence to the contrary.
Accordingly, the cost of the item ($ 40,030.00) is dutiable.
ITEM 2.1-8 SEA VALVE INSPECTIONS.....................$ 74,660.00
This item involves the inspection of sea valves and sea chests
pursuant to American Bureau of Shipping requirements. Applicant
asserts that the charges included in this item should be classified
as non-dutiable incidents to a required inspection.
In accordance with the authority cited in the previous item,
the item in question clearly constitutes a dutiable transaction.
The so-called "inspection" under consideration includes charges for
"clean[ing] all valve(s)," "grind[ing] in/fitting in same," and
"remov[ing] and replac[ing]" parts. We note with interest that the
charges for materials associated with this inspection (allegedly in
which no repairs were made nor new parts installed) totalled
$ 7,520.00. As this unusually high cost suggests something other
than a simple inspection, in accordance with C.S.D. 79-277, we find
that these items are not related to inspections, but are dutiable
incidents to repair. Accordingly, the cost of the item is dutiable.
ITEM 2.1-9 SEA CHEST STRAINER INSPECTIONS............$ 9,600.00
This item involves the inspection of sea chests pursuant to
American Bureau of Shipping and United States Coast Guard
requirements which applicant asserts should be classified as non-
dutiable incidents to a required inspection.
With regard to this item, the invoice included charges for
"water-blasting and hand scraping" and "completion of the hull
painting." In accordance with C.S.D. 79-277, these charges are not
related to inspections, but are dutiable incidents to repair.
Accordingly, the entire cost of the item is dutiable.
ITEM 2.1-10 PROPELLER................................$ 26,650.00
This item involves charges for propeller waterblasting and
polishing rendered pursuant to ABS surveys. 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).
From these authorities, we determine that the cost of propeller
polishing is subject to duty under 19 U.S.C. 1466. The term
deterioration is defined to mean degeneration, which in turn denotes
declined function from a former or original state. See The American
Heritage Dictionary of the English Language 376, 387 (2d ed. 1985).
The principal function of the propeller is to efficiently displace
water so that a vessel may propel and maneuver itself. The
collection of marine deposits decreases this displacement causing
reduced engine efficiency. Left unattended, these accumulated
deposits may ultimately cause deterioration of the propeller. The
removal of such deposits through scraping, wire brushing, wiping, or
polishing results in a restoration of the propeller to good
condition following a decline in its function. As such, such
operations constitute maintenance. Accordingly, the charges for
waterblasting and polishing the propeller are dutiable.
ITEMS 2.1-11 through 2.2-2 INSPECTION ITEMS..........$ 375,820.00
These items represent charges for various operations associated
with inspections. In accordance with previously stated authority,
with the exception of the $ 5,120.00 charge for staging, the
remainder of the item is dutiable in full.
ITEM 3.1-1 HULL WASH.................................$ 73,330.00
This item represents charges for high-pressure water washing to
the hull which applicant contends was performed pursuant to
inspection. Viewed by itself, this item would not appear to be
associated with repairs. However, we note that the items
immediately following this relate to the gritblasting and painting
of the hull. Circumstances such as these can cause items which by
themselves are not considered to be repair operations, to become so
when directly linked with dutiable procedures as seems to be the
case here. Accordingly, in the absence of evidence to the contrary,
we hold that the grit blasting of the hull was done in preparation
for the painting of the hull and is thus considered dutiable.
ITEM 3.1-7 SEA CHEST SCOOP...........................$ 21,200.00
This item represents charges for repairs to the Main Scoop
which are alleged to have been necessitated by damages which
occurred during inspections. The invoice indicates that "mechanical
chipping, wirebrushing, and * * * patching up with 'Belzonia'
plastic compound," took place in Job #235, but no evidence was
presented to show that these repairs remedied damages resulting from
inspections. Absent such evidence, the cost of this item is
dutiable.
ITEM 3.1-10 E.R. BALLAST CROSS OVER PIPE.............$ 112,750.00
This item represents charges for repairs made to the sea
valves, main condenser overboard valve, main circulation pump
discharge valve, main circulation pump packing gland and overboard
inside forepeak. With the exception of the charge of $ 1,600.00 for
cleaning associated with Job #232, the remainder of the operations
in this item constitute repairs and are fully dutiable.
ITEM 3.3-1 HATCH COVER REPAIRS........................$ 341,945.00
This item represents charges for repairs made to the hatch
covers. The invoice contains a $ 1,440.00 charge for "[l]ifting and
shifting aside one off pontoon hatch cover (No. 12C) and
replacing" and a $ 55,000.00 charge for "[r]emoving ashore and
chocking up 19 off pontoon type hatch covers for carrying out
repairs, lifting and returning to vessel and reinstalling hatch
covers on completion."
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. 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 item ($ 341,945.00) is dutiable.
ITEM 4.1-11 TEST BALLAST PIPE SYSTEM.................$ 206,500.00
This item represents charges for various operations associated
with inspections. In accordance with the authority cited previously
in item 2.1-7, this item is dutiable in full.
ITEM 4.1-12 H.P. TURBINE INSPECTION Job #161.........$ 109,000.00
This item represents charges incurred in preparing the turbine
for inspection. However, included in this item are charges for
"restoration of disturbed insulation," "cover[ing] up opened turbine
and protect[ing] by means of polyethylene covers," and "on
completion of reassembly, standing-by ship's crew tests and proves
main unit in operation." With regard to the "restoration..." and
the "covering up...", such charges are repair elements and they are
not segregated. Accordingly, those charges are dutiable. With
regard to the testing of a unit which underwent restoration, it is
well settled that according to C.S.D. 79-277, 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, is not exempt from duty. Additionally, we note
that the remaining charges in Job 161 which involve "renewal" are
also dutiable as repairs.
ITEM 4.1-12 MAIN STEAM STRAINER......................$ 4,500.00
This item involves operations performed pursuant to
dismantling, cleaning and repairing the turbine pursuant to
inspection. The invoice indicates that the joint landing was
"skimmed up," and the valve was "boxed up with a new joint."
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.
Here, as such non-segregated repair charges are present in the item,
it is fully dutiable.
ITEM 5.1-7 P & S BOILER Job #230.....................$ 4,050.00
This item represents charges for providing a temporary portable
pump and pumping out ballast pipe water. These operations were
performed pursuant to maintenance painting and are therefore
dutiable.
ITEM 3.3-16 CONTAINER LASHING D-RINGS
ITEM 3.3-34 F.O. LINE TESTS
ITEM 4.1-9 H.P. TURBINE FLEX COUPLING
ITEM 4.2-7 THRUST BEARING
ITEM 5.1-36 MEGGER TEST
The five items above are each considered a non-dutiable testing
operation performed pursuant to inspection.
OVERHEAD............................................$ 1,094,278.00
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.
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