VES-13-18-CO:R:IT:C 112222 LLB
Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90731
RE: Vessel repair; Inspection; Cleaning; Segregated cost; Vessel
PRESIDENT ROOSEVELT, V-69; Application for Relief; Entry
number C27-0061042-4
Dear Sir:
Reference is made to your memorandum of April 22, 1992,
which forwards for our consideration the Application for relief
from the assessment of vessel repair duties filed by American
President Lines, Ltd., concerning the above-captioned vessel
repair entry.
FACTS:
The vessel PRESIDENT ROOSEVELT arrived in the port of Los
Angeles, California, on October 28, 1991, and filed a vessel
repair entry the next day. The vessel, while in the Far East,
had been placed in drydock for the purpose of undergoing Coast
Guard and American Bureau of Shipping inspections as well as
repair operations. The Application for Relief from the
assessment of duties is limited to nine (9) specific items and a
single general claim. The items for which relief is sought are:
1. Item 509 - Anchor chain inspection
2. Item 513 - Salt water ballast tank inspection
3. Item 513.2 - Additional ballast tank inspection
4. Item 514 - Switchboard inspection
5. Item 515.3 - Fuel and diesel tank operations
6. Item 521 - Tailshaft survey
7. Item 532 - Various gauging operations
8. Item 557 - Auxiliary boiler hydro-testing
9. Item 558 - Exhaust gas economizer inspection
10. General claim that foreign shipyard office expenses not
actively related to repair activities are non-dutiable
overhead charges.
ISSUE:
Whether the items under consideration may be considered duty-
free by virtue of non-association with or segregation from
operations which are dutiable under the vessel repair statute.
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.
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.
In regard to the dutiability of surveys and inspections it
should be noted that 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 thereof. This is as
distinguished from a survey, regardless of how titled, whose
source is a carrier-initiated maintenance and repair or other
program, scheduled or otherwise. Applicants seeking a
nondutiable determination regarding ABS surveys must submit both
the invoice and the corresponding report (Ruling Letter 110710).
Customs has consistently held that where the charges for
dutiable and non-dutiable items are not segregated within an
invoice, all of the charges in that invoice must be deemed
dutiable (Ruling Letter 108567). Among those items traditionally
considered non-dutiable if properly segregated are the cost of
staging and transportation.
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 "overhead" charges such as are included
in the entry under consideration are considered dutiable.
In applying the foregoing to the matter presently under
consideration, we find that items 1, 2, 3, 4, and 9 are charges
for non-dutiable operations. They all involve the opening-up,
cleaning for non-repair-related inspection, and closing after
inspection of various areas of the vessel. Items 7 and 8 are
also duty-free. Item 7 represents the cost of various gauging
operations where all was found to be within acceptable tolerances
and no repair was performed. Item 8 is the cost of
satisfactorily hydro-testing the auxiliary boiler, with no
associated repair operations.
Items 5 and 6 are wholly and partially dutiable,
respectively. Item 5 attempts to segregate some repair
operations in an otherwise non-dutiable item, but does so in such
a fashion that it is not possible to attribute the segregated
amounts. As such, the entire item is subject to duty. With
regard to item 6, there is a segregated cost for welding and
coating which is dutiable. The remaining cost of the item is
duty-free.
The largest single claim involves the so-called overhead
expenses. A letter from the foreign repair facility indicates
that $13.00 of every $25.00 charged as the hourly labor rate is
for non-productive overhead expenses. This represents 52 percent
of the foreign labor cost. We find that there is no
justification for allowing this claim and hold these charges to
be dutiable under the previously-stated precedent.
HOLDING:
Following a thorough review of the facts as well as analysis
of the law and applicable precedents, we have determined that the
Application for Relief filed in this matter should be allowed in
part and denied in part, as detailed in the Law and Analysis
portion of this ruling.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch