VES-13-08-RR:IT:EC 226485 GEV
Chief, Liquidation Section
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94111
RE: Protest No. 2704-95-102456; Vessel Repair Entry No. C27-0054146-2;
PRESIDENT KENNEDY; V-28; Protective Covering; Cleaning;
Staging; Transportation; Modifications;
Administrative Costs; 19 U.S.C. 1466
Dear Sir:
This is in response to your memorandum dated September 25,
1995, forwarding the above-referenced protest with supporting
documentation for our review. Our ruling is set forth below.
FACTS:
The PRESIDENT KENNEDY is a U.S.-flag vessel owned and
operated by American President Lines, Inc. (APL). The vessel
incurred costs for foreign repair work during March of 1991.
Subsequent to the completion of this work the vessel arrived in
the United States at San Pedro, California on April 14, 1991. A
vessel repair entry was timely filed on April 16, 1991.
A timely filed application for relief was granted in part
and denied in part pursuant to Headquarters Ruling 111829, dated
December 17, 1991. A timely filed petition for review of the
aforementioned ruling was granted in part and denied in part
pursuant to Headquarters Ruling 112124, dated March 14, 1995.
The subject entry was liquidated on June 2, 1995. A protest
requesting further review, dated August 7, 1995, was timely filed
requesting relief for the following work appearing on Jurong
Shipyard Limited invoice no. 16441, dated June 3, 1991:
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Item No. 1-23 - Protective Floor Covering
Item No. 3.1-3 - Staging
Item No. 3.3-11 - Staging
Item No. 3.6-9 - E.R. Exh. Louvers
Item No. 3.6-9 - E.R. Exh. Staging
Item No. 3.6-21 - Staging
Item No. 999-6 - B.T. Void Space - Clean
Item No. 3.6-7 - Cleaning in Funnel
Item No. 5.3-1 - Stack Extensions
Item No. 5.6-13 - P/S LT/HT Cooler
Item No. 5.4-10 - Transportation
Item No. 5.4-13 - Transportation
Item No. 5.6-29 - Staging
Item No. 5.6-29 - Transportation
All Administrative Charges appearing throughout the
invoice.
Attached to the CF 19 and referenced therein is a letter
from the protestant, dated July 31, 1995, detailing the claims
for relief and enclosing the following: (A) a copy of
Headquarters Ruling 112124, and (B) C-10 General Arrangement -
Drawing HDW 230-0290-0202.
ISSUE:
Whether evidence is presented sufficient to allow the
protest regarding the dutiability of certain foreign costs under
19 U.S.C. 1466.
LAW AND ANALYSIS:
Title 19, United States Code, 1466 (19 U.S.C. 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..."
Item No. 1-23 covers protective floor covering which, the
protestant states, was located in accommodation spaces only. The
protestant states that this covering was not located in any
repair areas nor were any repairs performed in the accommodation
spaces. Furthermore, it is contended that the reason for this
covering was not for a repair, but rather to protect the
accommodation spaces from heavy traffic by inspectors, surveyors
and service representatives visiting the vessel during the yard
availability. Consequently, the protestant states that the
decision of the court in Texaco Marine Services, Inc., and Texaco
Refining and Marketing, Inc. v. United States, 44 F.3d. 1539 is
not applicable and the item should therefore be free of duty.
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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 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
below...the but for' interpretation accords with what
is
commonly understood to be an expense of repair."
44 F.3d 1539, 1544.
In reaching the above determination, the CAFC steadfastly
rejected the non-binding judicial authority relied upon by the
plaintiff/appellant. Specifically, the court addressed the
following: 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;
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 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 was not dutiable as expenses of
repairs. With regard to these three cases, the CAFC stated,
"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.
In addition to the above judicial authority, the CAFC
discussed at length the case of United States v. George Hall Coal
Co., 142 F. 1039 (1939), heavily relied upon by the plaintiff/
appellant, which held dry-docking expenses were not an expense of
repair and therefore were not dutiable. Although this decision
seemingly supported the position that the expenses at issue were
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dutiable, the CAFC examined the rationale provided in a December
31, 1903, unpublished decision of the Department of Treasury
Board of General Appraisers (Board) upon which the court's
decision was based. It 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.
Recognizing that the decision of the CAFC was not only
dispositive of the expenses at issue, but also instructive as to
Customs 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,
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 two 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 pass the "but for" test
discussed above.
Subsequent to the publication of the above memorandum, on
February 22, 1995, various representatives of U.S.-flag vessel
owners/operators, including the protestant, met with the
Assistant Commissioner, Office of Regulations and Rulings. It
was the collective opinion of the vessel owners/operators that
the memorandum 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 this matter, the Assistant Commissioner, Office
of Regulations and Rulings, again issued a memorandum to the
Regional Director, Commercial Operations Division, New Orleans
(file no. 113350), dated March 3, 1995, published in the Customs
Bulletin on April 5, 1995 (see Customs Bulletin and Decisions,
vol. 29, no. 14, at p. 24) clarifying the January 18 memorandum
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 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). With respect to vessel repair entries filed prior to
December 29, 1994 (such as the one currently the subject of this
protest), 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 on Customs rulings (some of which were based on court
cases which the CAFC in Texaco held were incorrectly decided),
and retroactive application would cause both the Government and
the carriers a major administrative burden,
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Customs will not apply Texaco retroactively except as to the two
issues directly decided by the court. All other costs contained
within such entries are to 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).
In regard to Item No. 1-23, the shipyard invoice provides as
follows:
"PROTECTIVE FLOOR COVERING"
"Covered the accommodation alleyways and designated
cabins,
messrooms and offices with polythene sheet and hard
plywood
during the repair period." (Emphasis added)
Assuming arguendo, as the protestant suggests, that no
repair work was actually done to above-referenced alleyways,
cabins, messrooms and offices, the shipyard invoice nonetheless
provides irrefutable evidence that the cost of the protective
covering in question was incurred pursuant to dutiable repairs
performed on the vessel. Accordingly, the decision of the court
in Texaco is applicable to the subject protest and Item No. 1-23
is therefore dutiable.
Item Nos. 3.1-3, 3.3-11, 3.6-9, 3.6-21 and 5.6-29 all cover
costs for staging. The protestant states that staging costs,
when identified and priced separately, are non-dutiable. While
that statement is correct pursuant to Headquarters Rulings 105172
and 106713 for all pre-Texaco entries such as the one which is
the subject of this protest, we note that the shipyard invoice
upon which the subject staging costs are listed does not provide
for the cost segregation to which the protestant refers. Rather,
the staging covered by each of the aforementioned items, although
described separately from some of the repair work listed
thereunder, nonetheless is included with other dutiable work in
one charged amount. Specifically, the cost for staging set forth
in Item 3.1-3 also covers the tightening of anodes and the
filling of bolt holes with cement, the costs for staging set
forth in Items 3.3-11, 3.6-9 and 3.6-21 include the cost of
painting, and the cost of staging in Item 5.6-29 includes the
cost of repairing the cargo hold exhaust fan rotor (i.e.,
stripping off the winding, rewinding, varnishing, and renewing
bearings). Pursuant to C.I.E.s 1325/58 and 565/55, relief may
not be granted where the invoice does not show a breakdown of
what is dutiable and what is not. Accordingly, the staging
referenced in Item Nos. 3.1-3, 3.3-11, 3.6-9, 3.6-21 and 5.6-29
is dutiable.
Item 3.6-9 covers work entitled, "ENGINE ROOM EXHAUST FAN
OUTLET." The shipyard invoice contains the following description
with respect to this work: "Fabricated, cropped, fitted and
welded louvers vent on the port side aft. of the funnel house."
With respect to this item the protestant states that Headquarters
ruling 112124 granted it duty-free status but it was made
dutiable at the time of liquidation. We note that the petition
referred to this item as a
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"class item warranty modification." (See p. 3 of the petition
letter dated January 17, 1992) It was therefore reviewed in
light of the criteria for both a warranty item and a modification
and denied as to the former but granted as to the latter. (See
Headquarters ruling 112124, p. 5). Notwith-standing this
determination, the work was liquidated as dutiable. This
discrepancy therefore merits further review of this item.
With respect to warranty claims, Customs has in the past
had occasion to consider the validity of warranty agreements, and
has found that the cost of repairs performed pursuant to claimed
warranty work is subject to vessel repair duty (see published
Customs Service Decision (C.S.D. 81-50)). Consequently, the
warranty claim for Item 3.6-9 was denied.
In regard to modification claims, Customs has held that
modifications to the hull and fittings of a vessel are not
subject to vessel repair duties. Over the course of years, the
identification of modification processes has evolved from
judicial and administrative precedent. In considering whether an
operation has resulted in a modification which is not subject to
duty, the following elements may be considered.
1. Whether there is a permanent incorporation into the hull or
superstructure of a vessel (see United States v. Admiral Oriental
Line et al., T.D. 44359 (1930)), either in a structural sense or
as demonstrated by the means of attachment so as to be indicative
of the intent to be permanently incorporated. This element
should not be given undue weight in view of the fact that vessel
components must be welded or otherwise "permanently attached" to
the ship as a result of constant pitching and rolling. In
addition, some items, the cost of which is clearly dutiable,
interact with other vessel components resulting in the need,
possibly for that purpose alone, for a fixed and stable
juxtaposition of vessel parts. It follows that a "permanent
attachment" takes place that does not necessarily involve a
modification to the hull and fittings.
2. Whether in all likelihood, an item under consideration would
remain aboard a vessel during an extended lay up.
3. Whether, if not a first time installation, an item under
consideration replaces a current part, fitting or structure which
is not in good working order.
4. Whether an item under consideration provides an improvement
or enhancement in operation or efficiency of the vessel.
Very often when considering whether an addition to the hull
and fittings took place for the purpose of 19 U.S.C. 1466, we
have considered the question from the standpoint of whether the
work involved the purchase of "equipment" for the vessel. It is
not possible to compile a
complete list of items that might be aboard a ship that
constitute its "equipment". An unavoidable problem in that
regard stems from the fact that vessels differ as to their
services. What is required equipment on a large passenger vessel
might not be required on a fish processing vessel or offshore
rig.
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"Dutiable equipment" has been defined to include:
...portable articles necessary or appropriate
for the navigation, operation, or maintenance
of a vessel, but not permanently incorporated
in or permanently attached to its hull or
propelling machinery, and not constituting
consumable supplies. Admiral Oriental,
supra., (quoting T.D. 34150, (1914))
By defining what articles are considered to be equipment,
the Court attempted to formulate criteria to distinguish non-dutiable items which are part of the hull and fittings of a
vessel from dutiable equipment, as defined above. These items
might be considered to include:
...those appliances which are permanently
attached to the vessel, and which would
remain on board were the vessel to be laid
up for a long period... Admiral Oriental,
supra., (quoting 27 Op. Atty. Gen. 228).
A more contemporary working definition might be that which
is used under certain circumstances by the Coast Guard; it
includes a system, accessory, component or appurtenance of a
vessel. This would include navigational, radio, safety and,
ordinarily, propulsion machinery.
In regard to the modification claim for Item 3.6-9, upon
reviewing the shipyard invoice it is readily apparent that all of
the four criteria for a modification enumerated above have been
met (the method of installation (i.e., welding) is indicative of
permanent attachment, it would remain aboard the vessel during an
extended lay up, it enhances the operation of the vessel, and the
work is a new item as opposed to one that is replacing an
existing defect). Accordingly, Item 3.6-9 meets the criteria
for a modification and is therefore not dutiable.
Item 5.3-1 is entitled "SSDG EXHAUST PIPE EXTENSIONS". The
shipyard invoice contains the following description with respect
to this work: "The exhaust pipe from the 3 generators were [sic]
modified by welding extensions to the existing as per
specifications." An additional charge appearing under this item
is as follows: "500 dia. X 2.5 mm x 9mmt x 1 length for boiler
pipe extension." With respect to this item, the protestant
states that Headquarters Ruling 112124 granted it duty-free
status but it was made dutiable at the time of liquidation. We
note that the petition referred to this item as a "Class warranty
item." (See p. 4 of the petition letter dated January 17, 1992)
It went on to state that "[t]he SSDG exhaust pipes and boiler
pipe were extended to correct an original design
deficiency...[i]t is therefore, an improvement." Id.
Consequently, this item was reviewed in light of the criteria for
both a warranty item and a
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modification and denied as to the former but granted as to the
latter. (See Headquarters ruling 112124, pp. 5-6)
Notwithstanding this determination, the work was liquidated as
dutiable. This discrepancy therefore merits further review of
this item.
As stated above, with respect to warranty claims Customs
has in the past had occasion to consider the validity of warranty
agreements, and has found that the cost of repairs performed
pursuant to claimed warranty work is subject to vessel repair
duty (see published Customs Service Decision (C.S.D. 81-50)).
Consequently, the warranty claim for Item 5.3-1 was denied.
In regard to the modification claim for Item 5.3-1, upon
reviewing the shipyard invoice, it is readily apparent that all
of the four enumerated criteria have been met (the method of
installation (i.e., welding) is indicative of permanent
attachment, the extensions would remain on board during an
extended lay up, the work is not replacing a current part of the
vessel not in good working order but is merely extending it, and
it provides an enhancement in operation of the vessel).
Accordingly, Item 5.3-1 meets the criteria for a modification and
is therefore non-dutiable.
Item 999-6 is entitled, "BOW THRUSTER VOID SPACE CLEANING"
and covered the removal of "...all the lub. oil, dirt and sand at
bow thruster space." The protestant states that the subject
cleaning "...was not cleaning for a repair, nor was it cleaning
after a repair." Notwithstanding the inapplicability of the
Texaco decision to the subject protest except for post- repair
cleaning and protective coverings as discussed above, Customs
long-standing position with respect to cleaning is that the
charges for such services are dutiable if the cleaning 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, 125/48, 910/59,
820/60, 51/61, 429/61, 569/62, 698/62, C.D. 2514, and T.D.s 45001
and 49531). In that regard we note that Item 3.1-7 of the
shipyard invoice, entitled "BOW THRUSTER SEALS AND ANODES",
specifies that the bow thruster was subjected to "maintenance
works." Maintenance is dutiable under the vessel repair statute
(see Headquarters rulings 111917). Accordingly, since the
cleaning covered by Item 999-6 was performed in conjunction with
dutiable work it is dutiable.
Item 3.6-7 is entitled, "Cleaning in Funnel." This cleaning
was accomplished with a chemical detergent and removed soot,
carbon and stains from "the areas of the main engine exhaust
smoke stack generators and boilers, various vent pipes, decks,
platform and access ladder approx 2500mm." (Emphasis added)
Item 3.6-8 on the shipyard invoice is entitled "MAIN ENGINE
EXHAUST STACK MODIFY AND RENEWAL" and covered repair work to the
main engine exhaust smoke stack. Consequently, the cleaning in
Item 3.6-7 was held dutiable as being done in conjunction with
the repairs performed in Item 3.6-7. The protestant contends
that the cleaning done in Item 3.6-7 "is not only poorly
described, it is inaccurately described." Specifically, the
protestant states that Item 3.6-8 has no relation to Item 3.6-7
since the "stack" referenced in the former is not the area that
was cleaned in the latter. Aside from this bald claim, the
protestant has submitted only a drawing (Enclosure B) depicting
the area of the vessel to
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which he is referring. The record is devoid of any documentation
from the shipyard corroborating the protestant's contention that
the shipyard invoice is inaccurate. Accordingly, in the absence
of such evidence, Item 3.6-7 is dutiable.
Item 5.6-13 is entitled, "P/S LT/HT F.W. Cooler Cleaning."
With respect to this item, the protestant states the following:
"The misunderstanding here occurs from item 5.6-14.
Item 5.6-14
does not exist. It was canceled and there is no cost
against item
5.6-14. Without item 5.6-14, item 5.6-13 becomes a
straightforward
cleaning item for inspection. There were no repairs
performed."
The record does not support this claim. The invoice contains no
information regarding the cancellation of Item 5.6-14 (which
covers dutiable repairs related to the cleaning covered by Item
5.6-13). Furthermore, the protestant has submitted no
documentation from the shipyard to that effect. Accordingly, in
the absence of such evidence Item 5.6-13 is dutiable.
Items 5.4-10, 5.4-13 and 5.6-29 include charges for
transportation. The protestant states that transportation costs,
when identified and priced separately, are non-dutiable. While
that statement is correct pursuant to C.I.E.s 204/60, 937/60,
1325/58 and C.D. 1836 for all pre-Texaco entries such as the one
which is the subject of this protest, we note that the shipyard
invoice upon which the subject transportation costs are listed
does not provide for the cost segregation to which the protestant
refers. Rather, the transportation covered by each of the
aforementioned items, although described separately from some of
the repair work listed thereunder, nonetheless is included with
other dutiable work in one charged amount. Specifically, the
costs for transportation set forth in Items 5.4-10 and 5.4-13
also cover overhauling the stator and renewing the bearings, and
the cost for transportation set forth in Item 5.6-29 includes the
cost of work done to the motor cover. Pursuant to C.I.E.s
1325/58 and 565/55, relief may not be granted where the invoice
does not show a breakdown of what is dutiable and what is not.
Accordingly, the transportation referenced in Item Nos. 5.4-10,
5.4-13 and 5.6-29 is dutiable.
Finally, the protestant cites Treasury Decision (T.D.) 39443
in support of its position that the cost of administrative
overhead is not dutiable. That decision, among others, has been
thoroughly discredited by the opinion of the U.S. Court of
Appeals for the Federal Circuit in Texaco. Customs has
determined that the decision rendered in Texaco, supra, will only
be applied from the decision date forward for all issues other
than repair-related cleaning and protective coverings. (See
Headquarters memorandum 113350, dated March 3, 1995, published in
the Customs Bulletin of April 5, 1995) Therefore, the protest
should be allowed in this case for administrative overhead
charges. (See Headquarters rulings 113085 and 113540) These
same types of charges will be held dutiable for all entries filed
on or after December 29, 1994.
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HOLDING:
Following a thorough review of the evidence submitted as
well as an analysis of the law and applicable precedents, we have
determined that for the reasons stated in the Law and Analysis
portion of this ruling, the protest under consideration must be
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
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,
Director
International Trade Compliance
Division