VES-13-18-RR:IT:EC 114650 LLB
Chief, Residual Liquidation and Protest Branch
ATTN: Vessel Repair Liquidation Unit
New York Region
6 World Trade Center
New York, New York 10048-0945
RE: Vessel repair; Protest; Vessel MORMACSKY; Entry No. 458-0014931-7; Protest number 1001-98-102585; Date of arrival April 27, 1997, at the Port of New York, New York
Dear Sir:
Reference is made to your memorandum regarding the above-captioned Protest regarding the assessment of duty under the vessel repair statute. The Protest was filed by counsel on behalf of Mormac Marine Transport, Inc., the vessel operator.
FACTS:
The vessel MORMACSKY, while abroad, had certain operations performed upon it in a foreign shipyard located in Livorno, Italy. A defective filing constituting an improproper Application for Relief was filed and rejected without any determination on the merits, as memorialized in Headquarters Ruling Letter 114161.
The present Protest encompasses 47 of the 208 foreign shipyard items which were the subject of the underlying vessel repair entry. Counsel has divided the protested items into four categories, which are:
Claimed permanent modifications to the vessel, to include shipyard invoice items 51 (OilCon monitor sample piping); 59 (ballast filling system); 90 (cleat installed at forward life raft); 95 (focsle rope scuttle); 96 (change fore peak tank hatch type); 98 (installation of fish plate tank strainer); 114 (install new design incinerator); 155 (create capability to carry MTBE fuel additive); 156 (installation of emergency towing package); 164 (install new hydraulic pumping system in cargo tanks); 179 (install pump room ladder); 191 (install main deck deflector pipe); 198 (change configuration of shaft and cover on mooring winch); 201 (install engine room air compressor).
Claimed regulatory inspections without repair elements, to include invoice numbers 15 (inspect sea chests and strainers); 16 (inspect sea valves); 22 (inspect rudder); 23 (inspect tailshaft); 57 (hydro inspect main deck cargo piping); 136 (inspect inery gas equipment); 142 (boiler survey); 151 (inspect ten ton cargo boom); ABS (regulatory surveys and inspections).
Claimed general and drydock services as not subject to proration, to include invoice numbers 1a through 1m, 2, 3a and b, 5 through 8, 10, and 199 (reflecting various general services, drydocking charges, and staging costs).
Claimed labor costs not subject to duty because of being performed by residents of the United States who traveled to the vessel from this country.
ISSUE:
Whether the cost items related in the Facts portion of this ruling are subject to duty under the vessel repair statute, 19 U.S.C. 1466.
LAW AND ANALYSIS:
Section 466(a), Tariff Act of 1930, as amended (19 U.S.C. 1466(a)) provides, in pertinent part, that:
The equipments, or any part thereof ... 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 to engage in the foreign or coasting trade, or a vessel intended to be employed in such trade, shall, on the first arrival of such vessel in any port of the United States, be liable to entry and the payment of an ad valorem duty of 50 per centum on the cost thereof in such foreign country.
In its administration of the vessel repair statute, Customs has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis a vis work constituting repairs has evolved from judicial and administrative precedent. (See Otte v. United States, 7 Ct. Cust. Appls. 166, T.D. 36489 (1916); United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137, T.D. 44359 (1930); and Customs Bulletin and Decisions, Vol. 31, Number 40, published October 1, 1997.) The factors discussed within the cited cases are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a particular case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue of whether certain work may be a modification of a vessel which is nondutiable under the law.
While it is true that certain foreign shipyard operations such as proven modifications are considered to be non-dutiable, it is also the case that pursuant to published Customs Service rulings (C.I.E. 1325/58 and C.I.E. 565/55), duties may not be remitted in cases where invoices fail to segregate dutiable from non-dutiable expenditures. The presence of unsegregated expenses will render an entire item subject to duty as a repair expense, which item might otherwise qualify for duty-free treatment. This element comes into play in situations in which the item to be modified is in need of repair at the time the modification is performed.
In the present matter, we have reviewed each of the claimed items and the documentary evidence submitted to support the claims. Critical in the consideration of such claims are representations that the modification process was not undertaken in order to address any wasting, deterioration or repair needs, but instead was a permanent addition to the vessel which is either a first time feature or replaces an existing feature which, while operational when replaced, was not able to benefit the vessel to the extent to be realized by the replacement feature. We find evidence to support the claims of modification with respect to each item so claimed. The Protest should be granted with respect to all modification claims.
With respect to the dutiability of testing, inspections, and surveys, Customs has held pursuant to C.S.D. 79-277 that where periodic surveys are undertaken to meet the specific requirements of a classification society, insurance carrier, etc., the cost of the survey is not dutiable even when dutiable repairs are effected as a result of survey findings. Likewise, cleaning in preparation for or following a duty-free survey not including any unsegregated repair elements is also free. This result is to be distinguished from a survey whose source is carrier-initiated maintenance and repair, scheduled or otherwise.
We find evidence in the file before us that the inspection elements under review were performed as part of a sequence required to maintain the vessel in its service classification. The offered evidence is in the form of the survey reports themselves. Further, we find no evidence that any repairs which might be subject to duty under the vessel repair statute were performed in connection with the surveys. As such, we find that the costs associated with
the reported surveys and inspections to be free of duty. The Protest should be allowed with respect to the cost of the reviewed surveys.
In Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the U.S. Court of International Trade (CIT) considered 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 these costs were dutiable as “expenses of repairs” the court adopted the “but for” test proffered by Customs; that is, such operations were an integral part of the dutiable repair process and would not have been necessary “but for” the need to conduct dutiable repairs.
On appeal, the 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, and thus the 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
below...the ‘but for’ interpretation accords with what is
commonly understood to be an expense of repair.
44 F.3d 1539, 1544.
In reaching its determination the CAFC steadfastly rejected the non-binding judicial authority relied upon by the plaintiff/appellant. Specifically, the court addressed:
1. Mount Washington Tanker Co. v. United States, 505 F.Supp. 209 (CIT 1980) which held that transportation compensation for members of a foreign repair crew performing dutiable repairs was not dutiable as an expense of repairs;
2. American Viking Corp. v. United States, 150 F.Supp. 746 (Cust.Ct. 1956) which held that the expense of providing lighting needed to perform a dutiable repair was not dutiable as an expense of the repair; and
3. International Navigation Co. v. United States, 148 F.Supp. 448 (Cust.Ct. 1957) which held that transportation expenses for a foreign repair crew to travel to and from an anchored vessel being repaired were not dutiable as expenses of repairs.
With regard to these three cases, the CAFC stated that, “Seemingly, these expenses too would have been viewed as coming within the [vessel repair] statute if the court had used a “but for” approach.” 44 F.3d 1539, 1547. The CAFC concluded, “Thus Mount Washington Tanker, like American Viking and International Navigation, was incorrectly decided.” Id.
Recognizing that the decision of the CAFC was not only dispositive of the expenses at issue, but also instructive as to proper administration of the vessel repair statute with respect to the interpretation of the term “expenses of repairs” contained therein, the Assistant Commissioner, Office of Regulations and Rulings, issued a memorandum to the Regional Director, Commercial Operations, New Orleans (file no. 113308) dated January 18, 1995. That memorandum was published in the Customs Bulletin on February 8, 1995 (Customs Bulletin and Decisions, vol. 29, no. 6, at p. 59) In that memorandum, copies of which were disseminated to the other Customs field offices charged with the liquidation of vessel repair entries, it was stated that pursuant to the decision of the CAFC, a myriad of foreign repair expenses previously accorded duty-free treatment would, under certain circumstances, no longer receive such treatment. The memorandum further provided that any such affected costs contained in vessel repair entries not finally liquidated as of the date of the CAFC decision (December 29, 1994) should be liquidated as dutiable “expenses of repairs” provided they were first examined under the “but for” test discussed above.
Subsequent to the publication of the above-cited memorandum, on February 22, 1995, various representatives of U.S.-flag vessel owners/operators met with the Assistant Commissioner, Office of Regulations and Rulings, and members of his staff. It was the collective opinion of the vessel owners/operators that the memorandum should be rescinded, contending, inter alia, that it was violative of 19 U.S.C. § 1625(c)(1) and 19 CFR Part 177. Upon further review of the matter, the Assistant Commissioner issued a second memorandum to the Regional Director, Commercial Operations Division, New Orleans (file no. 113350), dated March 3, 1995. This memorandum was published in the Customs Bulletin on April 5, 1995 (see Customs Bulletin and Decisions, vol. 29, no. 14, at p. 24). The latest memorandum clarified the January 18 issuance with respect to Customs implementation of the CAFC decision. It provided that all vessel repair entries filed with Customs on or after the date of that decision were to be liquidated in accordance with the full weight and effect of the court 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). With respect to vessel repair entries filed prior to December 29, 1994, all costs for post-repair cleaning and protective coverings incurred pursuant to dutiable repairs are dutiable. It further provided that in view of the fact that carriers have relied upon Customs rulings (some of which were based on court cases which the CAFC in Texaco held were incorrectly decided), and because retroactive application would cause both the Government and the carriers a major administrative burden, Customs would not apply Texaco retroactively except as to the two issues directly decided by the court. All other costs contained within such entries would be accorded that treatment previously accorded them by Customs prior to the decision of the CAFC in the Texaco case. Parenthetically, we note that the CAFC decision was published in its entirety in the Customs Bulletin on March 8, 1995 (See Customs Bulletin and Decisions, vol. 29, no. 10, at p. 19).
With respect to this protest we note the claims for duty-free treatment concerning general port and shipyard services contained within the entry and presented as items such as the provision of telephones, water, shore power, pilot services, garbage removal, and a whole host of associated general services. Our consideration also includes the cost of drydocking the vessel and erecting and dismantling staging. In regard to these costs, since they are related to both dutiable and non-dutiable work in a manner which cannot be segregated, it is our position that such costs must be prorated between the dutiable and non-dutiable costs contained within this entry in keeping with the “but for” test articulated by the Court in the Texaco decision as previously discussed. Since it is not possible to specifically allocate these costs which span the entire foreign shipyard period to either dutiable or non-dutiable elements, the only means by which they can be fairly considered is to apportion them between the two. We determine that they should be apportioned.
Subsection (d)(2) of 19 U.S.C. 1466 provides that duty is to be remitted or refunded if the owner or master of a vessel provides evidence regarding vessel-related expenditures showing that:
...such equipments or parts thereof or repair parts or materials, were manufactured or produced in the United States, and the labor necessary to install such equipments or to make such repairs was performed by residents of the United States, or by members of the regular crew of such vessel . . .
The Customs regulation which implements this subsection, 19 CFR 4.14(c)(3), specifies the same elements and, in addition, requires that the qualifying items must be purchased by the vessel owner in the United States.
The statutory and regulatory requirements concerning the use of United States-manufactured items in foreign vessel repair operations have been the subject of administrative interpretations. Prominent among these is Treasury Decision 75-257 (T.D. 75-257), which holds as follows:
The cost of labor used in a foreign shipyard to install materials of United States origin, even though the materials were purchased by the vessel owner in the United States, is also subject to duty under 19 U.S.C. 1466. However, the cost of materials of United States origin which are purchased by the vessel owner in the United States is not subject to duty under 19 U.S.C. 1466, when installed on the vessel in a foreign country. (Emphasis added)
Thus, while it might be presumed from reading the statute alone that both the presence of qualified parts and qualified labor is required in order to invoke the benefits of subsection (d)(2), the terms of T.D. 75-257 establish that the cost of qualified parts may be considered for refund or remission even in the absence of the domestic labor element. In considering this issue we find no reason to apply the logic to parts only. When only qualified resident labor is involved, its duty-free use should be permitted even in the absence of parts. The Protest should be allowed with respect to the fourth elements as detailed in the Facts portion of this ruling.
HOLDING:
Following a thorough review of the evidence presented as well as analysis of the law and relevant judicial and administrative precedents, we have determined that this Protest should be granted in full for the reasons specified in the Law and Analysis portion of this ruling.
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 to the protestant no later than 60 days from the date of this letter. Any new billing (the equivalent of the reliquidation of an entry) in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.
Sincerely,
Acting Chief
Entry Procedures and Carriers Branch