VES-13-7/ 13-18-RR:IT:EC 226520 IOR
Chief, Liquidation Section II
U.S. Customs Service
Post Office Box 2450
San Francisco, CA 94126
RE: Protest No. 3001-95-100541; Vessel Repair Entry No. 110-0104128-1; PRESIDENT GRANT, V-120; administrative overhead;
cleaning; inspection; propeller; hull high pressure water
wash; transportation; Texaco Marine Services, Inc. and
Texaco Refining and Marketing, Inc. v. United States
Dear Sir:
This is in response to your memorandum dated October 23,
1995, forwarding a protest of HQ 112869 on the above-referenced
vessel repair entry. Our decision on this matter is set forth
below.
FACTS:
The President Grant is owned by American President Lines,
LTD of Oakland, California. The subject vessel underwent foreign
repairs in Taiwan and Hong Kong, B.C.C. during January, 1992.
Subsequent to the completion of these repairs the vessel arrived
in the United States at Seattle, Washington, on February 14,
1992. A vessel repair entry was filed on the same date. Two
previous requests for administrative relief were considered by
Customs Headquarters (HQ 112480 dated March 16, 1993 and HQ
112869 dated March 14, 1995). Presently, the dutiability of four
charges is being protested. The protested items are:
1) Item 2.1-10 Propeller waterblasting $ 2,100.00
2) Item 3.1-1 Hull high pressure water wash $73,330.00
3) Item 3.3-1 Hatch covers $ 1,
440.00
$ 55,100.00
4) All Administrative/overhead charges $779,057.00
All amounts are in Hong Kong dollars.
Items 1-3, upon being previously considered, were found to
be dutiable for failure to segregate dutiable from non-dutiable
elements and for lack of evidence that the charges were not
incurred for repair and maintenance. No new evidence or
documents have been submitted.
ISSUE:
Whether the costs at issue are dutiable pursuant to 19
U.S.C. 1466.
LAW AND ANALYSIS:
Title 19, United States Code, 1466 (a), provides in
pertinent part, for payment of duty at a rate of 50 percent ad
valorem on the cost of foreign repairs to vessels documented
under the laws of the United States to engage in foreign or
coastwise trade, or vessels intended to be employed in such
trade.
1) ITEM 2.1-10 PROPELLER WATERBLASTING.... $2,100.00
This item involves a charge for propeller waterblasting
rendered pursuant to an ABS survey. The protestant directs our
attention to a January 29, 1992 ABS Report on Drydocking Survey,
which indicates that, among other items, the propeller was
"cleaned as necessary, examined and considered satisfactory. The
invoice identifies the item as "Propeller ABS/USCG Inspection"
and describes the item as "waterblasting both sides of propeller
blades and hub to facilitate interest parties inspection." The
protestant contends that the propeller must be cleaned to base
metal before it can be inspected.
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., HQ 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, HQ 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 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.
In HQ 112480, we concluded that the removal of marine deposits
from a propeller results in a restoration of the propeller to
good condition following a decline in its function, and as such,
constitutes maintenance. We have not been provided with any
evidence to support a different conclusion.
Certain vessel inspection operations are generally
considered non-dutiable. Where periodic surveys are undertaken
to meet the specific requirements of, for example, a governmental
entity, a classification society or insurance carrier, the cost
of the surveys is not dutiable even when dutiable repairs are
effected as a result thereof. C.S.D. 79-277. With increasing
frequency, this ruling has been utilized by vessel owners seeking
relief not only from charges appearing on an ABS or U.S. 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, or 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.
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 were
necessary. Although the invoice indicated 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). 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
labeled "continuous" or "ongoing" is dutiable.
Moreover, we note that C.S.D. 79-277 does not exempt repair
work done by a shipyard in preparation of a required survey from
duty. Nor does it exempt from duty the cost of any testing by
the shipyard to check the effectiveness of repairs found to be
necessary by reason of the required survey.
With respect to the case before us, we have concluded that
the waterblasting of the propeller constitutes maintenance
following deterioration, and as such falls within the meaning of
the term repair as used in the vessel repair statute. In HQ
112045 dated March 10, 1992, we stated 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
(citing C.I.E. 429/61). Accordingly, we find that the work
performed in item 2.1-10 goes beyond mere cleaning, and
constitutes maintenance within the meaning of repair. No
evidence has been provided to show that the work in item 2.1-10
was done solely or primarily to facilitate the ABS inspection.
Therefore the charges for waterblasting the propeller are
dutiable. The Protest is denied with respect to this item.
2) ITEM 3.1-1 HULL HIGH PRESSURE WATER WASH....$73,330
This item is included in Invoice Section/ Item 3.1 which
covers "Hull and Underwater Repair and Maintenance." Items
included in this section which immediately follow this item,
relate to the gritblasting and painting of the hull. In HQ
112480 we stated that although by itself this item would not
appear to be associated with repairs, absent evidence that the
item was not done in preparation for gritblasting and painting
the hull, it is considered dutiable. The same reasoning was
followed in HQ 112869. Although no additional evidence has been
provided, since HQ 112869 was issued, we have issued HQ 113470
dated July 5, 1995. In HQ 113470 we found that a cost incurred
for a hull high pressure water wash constitutes a non-dutiable
inspection-related charge rather than a dutiable repair. As in
the instant case, according to the invoices, the item was
followed by hull painting preparation. Although hull washing
alone prior to painting can be dutiable, in this case the invoice
provides sufficient evidence to hold that item 3.1-1 was solely
or primarily for the purpose of the ABS inspection. We conclude
that the high pressure water wash of the hull in this case is a
non-dutiable inspection-related charge rather than a dutiable
repair. The Protest is granted with respect to this item.
3) ITEM 3.3-1 HATCH COVERS....$1,440.00 and $55,100.00
This item represents charges for a) "lifting and shifting
aside one off pontoon hatch cover (No. 12C) and replacing" and b)
"remove 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...." The protestant
claims remission of these expenses on the grounds that they are
transportation, cranage and handling expenses, which do not
involve any disassembly, reassembly or preparation for shipment.
In addition, the protestant states that Texaco Marine Services,
Inc. and Texaco Refining and Marketing, Inc. v. United States, 44
F.3d 1539 (Fed. Cir. 1994) is not retrospectively applicable to
this entry, with respect to this transportation item. The
protestant is correct in its assertion that Texaco Marine
Services is not retrospectively applicable to this entry on this
issue. With respect to vessel repair entries filed prior to
December 29, 1994, and not fully liquidated prior to that date,
Customs has determined that Texaco Marine Services is
retrospectively applicable only to costs for post-repair cleaning
and protective coverings incurred pursuant to dutiable repairs.
As we stated in HQ 112480, "transportation" does not include
operations relative to preparing the item for shipping. Labor
for such services as removing a part from its housing or
mounting, or disconnecting an item, etc. does not constitute
transportation and is dutiable. The costs incurred with respect
to this item are dutiable because the record does not reflect
that these costs are solely for transportation and cranage, as
discussed in HQ 112869 and 112480. We have not received any
additional evidence that would cause us to reach a different
conclusion. The Protestant has not established that "lifting"
and "removing" the hatch covers do not involve removing or
disconnecting the parts from their housing or mounting. The
Protest is denied with respect to this item.
4) ALL ADMINISTRATIVE/ OVERHEAD CHARGES....$779,057.00
This item concerns the cost of administrative shipyard non-productive overhead expenses. In HQ 112480 and 112869 we stated
that it is Customs position that shipyard overhead costs are
included in the cost of the dutiable repair. However, in HQ
113085 dated March 23, 1995, we stated that as the decision
rendered in Texaco Marine Services, supra, will be applied from
the decision date (December 29, 1994) forward for all issues
except for repair-related cleaning and protective coverings, the
protest should be allowed for administrative overhead charges.
These same charges will be held dutiable for all entries filed on
or after December 29, 1994. As this entry was made prior to the
Texaco Marine Services decision, remission of this item should be
allowed, and the Protest is granted with respect to this item.
HOLDING:
Following a thorough review of the evidence submitted as
well as analysis of the law and applicable precedents, we have
determined that for the reasons stated in the Law and Analysis
section of this decision, the Protest under consideration must be
granted in part and denied in part as detailed in the Law and
Analysis section of this decision.
Consistent with the decision set forth above, you are hereby
directed to deny the subject protest. In accordance with Section
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, with the Customs Form 19, to the
protestant no later than 60 days from the date of this letter.
Any reliquidation of the 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,
Director
International Trade
Compliance Division