VES-13-18-RR:IT:EC 113740 GEV
Chief, Liquidation Section
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126
RE: Protest No. 3001-96-100753; Vessel Repair Entry No. 110-6461683-9;
PRESIDENT JEFFERSON; V-312/313; General Services;
Proration; Repairs;
19 U.S.C. 1466; Texaco Marine Services, Inc., and
Texaco Refining and
Marketing, Inc. v. United States, 44 F.3d 1539 (1994)
Dear Sir:
This is in response to your memorandum dated October 24,
1996, forwarding the above-referenced protest. Our ruling is set
forth below.
FACTS:
The PRESIDENT JEFFERSON is a U.S.-flag containership owned
and operated by American President Lines, Inc. ("APL"). The
subject vessel encountered heavy weather while en route on a
loaded passage from Seattle, Washington, to Yokohama, Japan,
during December 7-20, 1994, resulting in damage to the foremast,
containers on board, and various deck fittings. Temporary and
some permanent repairs were performed by the crew at sea and at
Yokohama where the vessel arrived on December 21, 1994. The
vessel departed Yokohama on the same day of its arrival and then
proceeded to Hyundai Mipo Dockyard Co., Ltd. in Ulsan, Korea,
where it incurred foreign shipyard expenditures during December
31, 1994 - January 12, 1995. Subsequent to the completion of the
work in question, the vessel arrived in the United States at
Seattle, Washington, on February 4, 1995. A vessel repair entry
was timely filed.
Pursuant to an authorized extension of time, an application
for relief with supporting documentation was timely filed.
Customs rendered its decision on the application for relief
pursuant to ruling letter 113501, dated October 24, 1995. A
petition for review of the aforementioned ruling, dated January
12, 1996, was timely filed. Pursuant to ruling letter 226729,
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dated June 7, 1996, Customs rendered its decision on the
aforementioned petition. The subject entry was forwarded for
liquidation which occurred on July 19, 1996. The protest, dated
October 16, 1996, was timely filed.
The protestant alleges that Customs ruling on the petition
(i.e., ruling letter 226729) was misapplied. In this regard it
is claimed that the total non-dutiable amount (exclusive of the
items designated to be pro-rata) of Item nos. 202-412 is
$87,237.00, not $75,263.00 as shown on the worksheet. This
difference of $11,974.00 is accounted for in the ruling which
recognizes Item nos. 218-223 as being duty-free in the total
amount of $11,974.00. In addition, the dutiable treatment and
proration of the general service expenditures (Item nos. 002-123
(excluding Item no. 113) and Drydock Item no. 201) are protested.
Finally, the following Item nos. are alleged to be non-dutiable:
113 (Dock Trial); 229 (Hatch Covers); 335 (Main Lube Oil Cooler);
336 (SSTG Lube Oil Cooler); and 412 (Bow Thrusters).
ISSUE:
Whether the protest should be granted.
LAW AND ANALYSIS:
Title 19, United States Code, 1466, provides in pertinent
part for the payment of an ad valorem duty of 50 percent of the
cost of "...equipments, or any part thereof, including boats,
purchased for, or the repair parts or materials to be used, or
the expenses of repairs made in a foreign country upon a vessel
documented under the laws of the United States..."
At the outset we note that upon reviewing the protestant's
contention that the Headquarters decision on the petition (ruling
letter 226729) was misapplied (see the first paragraph on p. 1 of
the protest), we agree that such a misapplication did occur. The
reliquidation of this entry will be corrected accordingly.
With respect to Item nos. 002-123 (excluding Item no. 113)
and Item no. 201, such costs cover the following general
services/drydocking expenses incurred during the period of time
the subject vessel was in the shipyard:
Item No. 002 - Insurance
Item No. 007 - Security
Item No. 101 - Lay Berth
Item No. 102 - Telephone Services (including the
overseas calls in question)
Item No. 103 - Fire Watch
Item No. 104 - Fireline Water
Item No. 106 - Garbage Removal
Item No. 107 - Crane Service
Item No. 108 - Shore Power
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Item No. 109 - A/C and Provisional Reefer Cooling Water
Item No. 110 - Fresh Water Supply
Item No. 112 - Tugboats/Pilots
Item No. 114 - Ship's Service Air
Item No. 116 - Engine Room Bilge Pumping to Holding
Tank
Item No. 117 - Gas Free Certificate
Item No. 118 - Temporary Lighting and Ventilation
Item No. 121 - Steam Heat to Quarters
Item No. 122 - Distilled Water Supply
Item No. 123 - Reballast Vessel to Undock
Item No. 201 - Drydock Vessel - ABS/USCG Inspection
The above costs were held to be dutiable on a pro rata
basis. With respect to this assessment, the protestant states
that, "...Customs has still not given any statutory, regulatory
or case law support for a pro rata application of duty." (See
protest at p. 2) In response to this statement, we reiterate our
position as set forth in our decision on the petition (ruling
letter 226729); that is, such treatment is well-founded in all
three of the aforementioned authority inasmuch as each authorizes
Customs assessment of duty on the "expenses of repairs". (See 19
U.S.C. 1466(a), 19 CFR 4.14(a), and Texaco Marine Services,
Inc., and Texaco Refining and Marketing, Inc. v. United States,
815 F.Supp. 1484 (CIT 1993), 44 F.3d 1539 (CAFC 1994))
In Texaco Marine Services, Inc., and Texaco Refining and
Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the
issue before the U.S. Court of International Trade (CIT) was
whether costs for post-repair cleaning and protective coverings
incurred pursuant to dutiable repairs constituted "expenses of
repairs" as that term is used in 19 U.S.C. 1466. In holding
that the costs at issue were dutiable as "expenses of repairs"
the court adopted the "but for" test proffered by Customs; that
is, these costs were an integral part of the dutiable repair
process and would not have been necessary "but for" the dutiable
repairs.
On appeal, the U.S. Court of Appeals for the Federal Circuit
(CAFC) issued a watershed decision which not only affirmed the
opinion of the CIT regarding the specific expenses at issue, but
also provided clear guidance with respect to the interpretation
of 19 U.S.C. 1466, hence, Customs administration of that
statute. In upholding the "but for" test adopted by the CIT, the
CAFC stated:
"...the language expenses of repairs' is broad and
unqualified.
As such, we interpret expenses of repairs' as covering
all
expenses (not specifically excepted in the statute)
which,
but for dutiable repair work, would not have been
incurred.
Conversely, expenses of repairs' does not cover
expenses
that would have been incurred even without the
occurrence
of dutiable repair work. As will be more clearly
illustrated
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below...the but for' interpretation accords with what
is
commonly understood to be an expense of repair."
44 F.3d 1539, 1544.
The CAFC discussed at length the case of United States v.
George Hall Coal Co., 142 F. 1039 (1906), heavily relied upon by
the plaintiff/appellant for the proposition that drydocking
expenses are not an expense of repair and therefore are not
dutiable. It is noteworthy that the published decisions in
George Hall Coal (T.D. 24932 (1904), aff'd 134 F. 1003, T.D.
26038
(1905), aff'd 142 F. 1039, T.D. 27068 (2nd Cir. 1908)) address
jurisdictional issues and are silent as to the dutiability of
drydocking expenses. 44 F.3d 1539, 1545 at fn. 5 However, the
CAFC examined the rationale provided in a December 31, 1903,
unpublished decision of the Department of Treasury Board of
General Appraisers (Board) which is the underlying decision in
the aforementioned published cases. The CAFC stated that this
examination was necessary because "...subsequent decisions of the
Court of International Trade and its predecessor, the Customs
Court, have viewed George Hall Coal as standing for the
proposition that the cost of a place to do work (i.e., a drydock)
is not dutiable as an expense of repairs, which in fact it does
not." 44 F.3d. 1539, 1546 at fn. 6 In examining this decision
the court noted that, "...the Board held the dry-docking expense
was not subject to the vessel repair duty because the Board found
that the expense would have been incurred irrespective of whether
or not dutiable repairs were performed." 44 F.3d 1539, 1546 The
CAFC went on to state, "George Hall Coal simply stands for the
proposition that expenses that would have been incurred
irrespective of whether or not dutiable repairs are performed are
not dutiable as an expense of repairs." Id. It therefore
concluded, "...George Hall Coal is entirely consistent with the
but for' interpretation of the statute." Id.
With respect to the general service expenditures covered by
Item nos. 002-123 (excluding Item no. 113) and Item no. 201, the
protestant states as follows:
"APL's position is that the initial and crucial
question is whether the
expenses in question would have been incurred even
without the occur-
rence of dutiable repair work. Thus, if the vessel
would have to be put
up on blocks in a drydock for purposes of a required
mandatory inspect-
ion, the "but for" test is set and the expenses are not
"expenses of repair."
Conversely, if the expenses are those which, but for
dutiable repair work,
would not have been incurred, then they are expenses of
repair and dutiable
(unless specifically excepted in the statute)." (See
protest at p. 3)
The issue as framed above is followed by the statement that,
"The drydocking was an expense that would have been incurred
even without the occurrence of dutiable repair work.'" (See
protest at p. 3) The protestant then concludes, "Thus, it meets
the but for' test and should be non-dutiable." (See protest at
p. 3) It is the absence of factual analysis coupled with the
lack of evidentiary support which undermines the protestant's
position.
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In regard to the protestant's claim, we note that American
Bureau of Shipping (ABS) invoice no. 605085J018 contained within
the record indicates that the following surveys were performed:
intermediate; drydocking; tailshaft; and boiler. Pursuant to
"ABS Rules for Building and Classing Steel Vessels 1992 PART 1 -
Classification, Testing and Surveys" submitted by the protestant,
these surveys are mandatory inasmuch as they are required to be
completed within certain time frames which vary according to the
specific survey involved (see 1/3.1.4, 1/3.2.1, 1/3.13.1, and
1/3.15.1, of the aforementioned publication, respectively).
Consequently, under the "but for" test in Texaco, supra, "general
services" conducted pursuant to these surveys would be non-dutiable inasmuch as "...the expense would have been incurred
irrespective of whether or not dutiable repairs were performed."
44 F.3d at 1546 We further note, however, and the protestant
does not dispute, that dutiable repairs were performed during the
time the subject vessel was drydocked. This is evidenced not
only by the Hyundai Mipo Dockyard Co., Ltd., invoice, but also by
the aforementioned ABS invoice which lists hull and machinery
repairs surveys. These latter two surveys were necessitated by
the incidence of actual repair work rather than being mandated by
the ABS based on the mere passage of time. As such, the general
services charges in question are attributed, in part, to dutiable
costs. The protestant has therefore not met the "but for" test
with respect to these charges.
In recognizing the inequities owing to a total assessment of
duty on expenses that are also attributed, in part, to non-dutiable costs, on p. 8 of Headquarters Ruling 113474, dated
October 24, 1995, Customs stated, in pertinent part:
"A "but for" test was utilized by the court in the
Texaco [case], supra.,
which test bases dutiability under the vessel repair
statute upon findings
that but for dutiable repair operations, an associated
expense would not
have been incurred. To be sure, in a great many vessel
repair cases which
include dry dock expenses there is at least some non-dutiable element
which could justify placing a vessel in dry dock. We
understand from the
decision of the CAFC in Texaco, supra., that dock
charges are non-dutiable
if the underlying reason for dry-docking is not subject
to duty, and that
such charges are dutiable if dutiable operations
underlie the docking. Proper implementation of the
decision of the court requires that we consider the
duty consequences in circumstances in which a mixed
justification for dry-
docking is present."
"Customs has experience in duty determinations in
another area involving a
mixed-purpose vessel repair expense. 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
expense which is associated
with shipyard operations. Since the expense is
incurred without respect to
whether the hot work to follow might constitute
dutiable repair work, or is
in connection with duty-free modification work, it is
the practice of Customs
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in liquidating such expenses to apportion the gas-freeing charges between
the cost of items which are remissible and those which
are subject to duty.
We are guided by the determination of the court in
Texaco, supra., to apply
the same formula to mixed-purpose dry-dock expenses.
Accordingly, the
cost associated with item 14 should be apportioned to
reflect the dutiable
and non-dutiable foreign costs in this entry."
The vessel repair entry now under consideration which, as
stated above, covers "mixed-purpose" expenses, was filed after
the CAFC decision in Texaco. In Headquarters Memorandum 113350,
dated March 3, 1995, published in the Customs Bulletin and
Decisions on April 5, 1995 (Vol. 29, No. 14, p. 24), we stated in
pertinent part:
"All vessel entries filed with Customs on or after the
date of that decision
[the CAFC decision in Texaco, December 29, 1994] are to
be liquidated
in accordance with the full weight and effect of the
decision (i.e., costs of
post-repair cleaning and protective coverings incurred
pursuant to dutiable
repairs are dutiable and all other foreign expenses
contained within such
entries are subject to the "but for" test)."
In accordance with Headquarters Ruling 113474 and Memorandum
113350, the general services/drydocking charges in question,
should be prorated between the dutiable and nondutiable costs
associated with the drydocking. This is in accord with C.I.E.
1188/60 which states, in pertinent part, "In liquidation, this
charge [of obtaining a gas-free certificate] should be
apportioned between the costs which are to be remitted and those
for which relief is not warranted and duty assessed on that
portion of the charge applicable to items which are not being
remitted." Therefore the general services expenditures
appearing in Item nos. 002-123 (excluding Item no. 113) and Item
no. 210 should be apportioned between the dutiable and non-dutiable costs contained within this entry.
Item no. 113 is entitled, "DOCK TRIAL" and provides as
follows:
"Provide additional mooring for carrying out four hour
dock trial
upon completion of main engine and auxiliary support
system
inspections, and modifications. Gangway to be swung
clear of
vessel, and propeller and bow thruster tunnel areas to
be kept
clear. Necessary personnel, according to normal yard
practice,
are to be kept in attendance during this trial."
With respect to Item no. 113, it is the position of the
protestant that the cost thereof pertains to Item nos. 320, 323,
324 and 325 which were held by Customs to be non-dutiable. Upon
further review of this matter, we are in accord with this
position. Accordingly, Item no. 113 is non-dutiable.
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Item 229 is entitled, "HATCH COVER GASKET REPAIR" and
provides as follows:
"Remove all hatch covers ashore or to floor of the
drydock. Block
up covers and clean for underside inspection. Inspect
all hatch covers
and report to owners superintendant [sic]. Any
authorized repairs to be
covered under a point' item." (Emphasis added)
The protestant states that no repair work is included in
this item, but rather it is a cost incurred solely to remove and
return the covers to and from a suitable area for inspection
purposes. Despite the fact that repairs are not covered by this
specific item number, the above invoice description makes it
readily apparent that cleaning was performed in conjunction with
transportation under this item. In addition, the cleaning was
done prior to dutiable repairs to the hatch cover rubber packing
and channels (See Item 229.1 of the invoice). Notwithstanding
Texaco, supra., under which this item would be held dutiable,
Customs has long-held cleaning done in preparation of dutiable
repairs to be dutiable. (C.I.E.s 51/61, 429/61 and 596/62).
Accordingly, Item no. 229 remains dutiable.
Item nos. 335 and 336 both cover the use of a solvent to
remove oil sludge deposits from the lube oil cooler. The
protestant contends that both items covered cleaning, not
repairs. It is further stated that the surfaces that were
cleaned were not in a deteriorated condition, nor was any
restoration work performed. We note that both items contain the
statement, "This is a cleaning item only, no repairs." 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).
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. In arriving at its decision, the court focused on
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whether the cleaning operation was simply the removal of dirt and
foreign matter from the boxes or whether it resulted in the
restoration of the part to good condition after deterioration or
decay. Id. at 98. The court determined that the cleaning 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. The Customs
Service has ruled that the regular cleaning of filters in most
instances does not result in liability for duty. See
Headquarters Ruling Letter 107323, dated May 21, 1985.
From these authorities, we determine that the costs of
cleaning the lube oil cooler covered by Item nos. 335 and 336 are
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). Notwithstanding the protestant's claim to the contrary,
the failure to clean oil sludge deposits from the lube oil cooler
will result in a diminished engine function. The removal of
these deposits through the use of a solvent results in a
restoration of the lube oil cooler to good condition. Such an
operation can be distinguished from cleaning a Rose Box or other
filter, for the collection of debris by these parts results not
in a diminution of function, but alternatively demonstrates the
proper function of the part. Furthermore, in rulings letters
111821, 111822 and 111903 Customs held the removal of carbon and
oil deposits from the main engine scavenger spaces to be a
dutiable maintenance operation. The removal of oil sludge
deposits from the lube oil cooler is akin to the removal of
carbon and oil deposits from the main engine scavenger spaces.
Accordingly, Item nos. 335 and 336 constitute dutiable
maintenance operations.
Item no. 412 is entitled, "BOW THRUSTER" and provides as
follows: "1. Checked & megger tested electric cable & bow
thruster motor. 2. Tested good order." The protestant states
that this cost was incurred pursuant to a mandatory regulatory
requirement and cites to
1/3.17.2(a) and (d) and 1/3.2.1(c) of the aforementioned ABS
publication. Upon reviewing these provisions, it is apparent
that the cost of this particular item was pursuant to the
required boiler and drydock surveys. Accordingly, Item no. 412
is non-dutiable.
HOLDING:
As discussed in the Law and Analysis portion of this ruling,
the protest is granted in part and denied in part.
In accordance with 3A(11)(b) of Customs Directive 099
3550-065, dated August 4, 1993, Subject: Revised Protest
Directive, this decision should be mailed by your office no later
than 60 days from the date of this letter. Any reliquidation of
the entry in accordance with this
decision must be accomplished prior to mailing the decision.
Sixty days from the date of the
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decision the Office of Regulations and Rulings will take steps to
make the decision available to customs personnel via the Customs
Ruling Module in ACS and the public via the Diskette Subscription
Service, Freedom of Information Act and other public access
channels.
Sincerely,
Jerry Laderberg
Acting Chief
Entry and Carrier Rulings Branch