VES-13-18 CO:R:IT:C 112478 GFM

Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831

RE: Vessel Repair; Modification; Application; Segregation of Costs; Inspection; Testing; Anchor Chains; Painting; Transportation; Megger;Overhead; Survey; Protective Wood Covering; Sea Trials; 19 U.S.C. 1466; M/V PRESIDENT HOOVER; V-121; Entry No. 110-0104125-7.

Dear Sir:

This letter is in response to your memorandum dated September 23, 1992, which forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry.

FACTS:

The vessel PRESIDENT HOOVER arrived at the port of Seattle, Washington, on January 24, 1992, and filed a timely vessel repair entry. The entry indicates that the vessel underwent foreign shipyard work at New Territories, Hong Kong, Yokohama, Japan and Kaohsiung, Taiwan from November, 1991 to January, 1992. This application seeks relief from duty for various charges incurred during vessel's dockage at said foreign ports.

ISSUE:

Whether the cost of foreign shipyard work completed aboard the subject vessel is dutiable pursuant to 19 U.S.C. 1466.

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.

ITEM 1.3-1 DOCKSIDE TRIALS

This item was initally submitted as a prospective drydocking operation and was subsequently cancelled. Accordingly, disposition is not required. ITEM 1.3-2 SEA TRIALS..............................$ 4,600.00

This item contains a segregated charge for sea trial labor and launch services. Applicant correctly states that the dockside labor portion of this item is dutiable. Applicant also correctly points out that the charges for launch services is non- dutiable. Accordingly, only that portion of the item attributable to sea trial labor ($ 4,325.00) is dutiable.

ITEM 2.1-7 ANCHOR CHAIN LOCKER.....................$ 21,965.00

This item involves operations undertaken pursuant to anchor chain repairs and inspections.

It is well settled 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. See C.I.E. 429/61. Customs has long held the cost of cleaning is non- 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. See C.I.E.s 18/48, 820/60, 51/61, 429/61; C.S.D. 2514 and T.D.s 45001 and 49531.

With regard to this item, although an inspection did take place, it is clear that the ranging of the anchors was performed in preparation for the admittedly dutiable repairs contained in this item. Accordingly the charge for this item ($ 21,965.00) is dutiable.

ITEM 3.1-1 H.P. WATER WASH FOR PAINTING............$ 77,370.00

This item involves charges for water-blasting of the hull which was performed pursuant to repair operations and ABS inspections. 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).

Both the invoice and the explanatory letter submitted by the applicant clearly indicate that the high-pressure water washing of the hull was performed in preparation of hull painting and other dutiable maintenance operations. Thus, in accordance with the cited authority, the cost of this item ($ 77,370.00) is fully dutiable.

ITEM 3.1-2 WOODEN PROTECTIVE PANELS................$ 16,260.00

This item involves the erection of temporary plywood protection of the deck and E.R. console to protect against hazards of repair. In accordance with C.I.E. 543/62, duty remission will not be granted for safety devices installed on a vessel. Such costs are considered an additional expense of the overall repairs and are thus dutiable.

ITEM 3.1-7 N.D.T. OUTBOUND CORNERS OF MAIN SCOOP...$ 2,630.00

According to the invoice description, the item involves charges for "[c]arrying out magnetic particle inspection on starboard side main scoop pipe aft. corner (Fr.101) and submitting report to Owner's Representative." Applicant asserts that this item amounts to a non-destructive inspection and is thus non-dutiable.

With regard to this item, as it appears that no repairs were undertaken pursuant to the inspection, the cost of the item ($ 2,630.00) is non-dutiable. ITEM 3.1-10 OVERBOARD SPOOL PIPE CLEANING..........$ 5,060.00

This item involves charges for "[s]craping and cleaning up 2 section overboard pipe internal surface[s] for inspection in way of stbd. after coolers." We note that this item is immediately preceded on the invoice by two items relating to the "cropping, renewing, and welding" of the spool pipe.

In C.I.E. 807/61, it was settled that chipping, scraping, and wire-brushing which are related to repair operations are dutiable incidents of repair.

Here, the invoice is unaccompanied by inspection documentation. Given that fact, and the item presumptive relation to the repair items mentioned, the cost of the item ($ 5,060.00) is fully dutiable.

ITEM 3.3-9 PORT SIDE BRIDGE WING...................$ 51,730.00

This item contains charges for the alleged removal and replacement of parts for access which applicant claims should be non-dutiable.

The numerous references to "renewing, repairing, and scraping" compel us to consider this item a dutiable repair. Accordingly, the entire cost of the item ($ 51,730.00) is dutiable.

ITEM 3.3-11 STORE LOADING CRANE....................$ 34,720.00

This item involves the disconnection, loading and transporting of the crane jib to the workshop for examination. Applicant states that repairs were carried out under a separate item. Applicant seeks to have these items considered non- dutiable on the basis that they constitute transportation costs.

According to C.I.E. 1325/58, charges for transportation of parts and materials between a vessel and a workshop are not dutiable if itemized separately. Moreover, it is the position of the Customs Service that "transportation" does not include operations relative to preparing the item for shipping. Thus, labor for such services as removing a part from its housing or mounting, or disconnecting an item, etc., does not constitute transportation and are thus, dutiable. See Headquarters Ruling Letter 112211, June 30, 1992. With respect to the case at hand, the invoice contains consolidated transportation charges and includes charges for services which may not be included in transportation costs. Accordingly, the entire cost of the items ($ 34,720.00) is dutiable.

ITEM 5.1-11 ENGINE ROOM FAN MOTORS.................$ 155,700.00

This item involves the repair of the engine room port and starboard side fan motors. The invoice states that the motors were disconnected and dismantled; parts were scraped and wire- brushed, and parts were renewed and tested after repairs.

In accordance with previously cited authority, these operation are clearly dutiable. Accordingly, the cost of this item, minus the costs for staging ($ 145,460) is dutiable.

ITEM 5.1-13 GLAND EXHAUST MOTOR....................$ 4,565.00

This item contains charges for "disconnecting and removing one off 3 HP electric motor to workshop, dismantling, cleaning and checking for inspection, varnishing and baking, winding, supplying and renewing one off ball bearing, renewing with Owner's supplied one off ball bearing, reassembling, testing, reshipping, refitting in same position, connecting up and testing on completion." Applicant asserts that the charges included in this item should be classified as non-dutiable incidents to a required inspection.

Customs Service Decision 79-277 stated, "[i]f the survey was undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier, etc., the cost is not dutiable even if dutiable repairs were effected as a result of the survey."

With increasing frequency, this ruling and subsequent rulings citing it, have been utilized by vessel owners seeking relief not only from charges appearing on an ABS or 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, 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 (emphasis added).

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 are necessary. Although the invoice indicates 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 (ABS). 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 labelled "continuous" or "ongoing" is dutiable.

Moreover, we note that C.S.D. 79-277 does not exempt from duty the cost of maintenance or repair work done by a shipyard in preparation of a required survey. Nor does it exempt from duty the cost of any testing by the shipyard to check the effectiveness of repairs completed previous to, or found to be necessary by reason of, the required survey.

With respect to this item, it is clear that it is a dutiable transaction according to the above-cited authority. Accordingly, the cost of the item ($ 4,565.00) is dutiable. ITEM 5.1-30 MEGGER TESTING.........................$ 13,000.00

This item contains charges for "Megger testing of the ship's electrical circuit[ry] and motors and submitting of test reports."

It is apparent that this item is intended to cover charges for repair operations without regard to their status. It is thus true that megger readings were performed in conjunction with dutiable repairs. Accordingly, as there is no segregation as to which megger readings relate to non-dutiable work, pursuant to C.I.E.s 1325/58, 565/55 and Headquarters Ruling Letter 109021, dated October 22, 1987, the entire cost of this item ($ 13,000.00) is dutiable.

OVERHEAD CHARGES................................$ 1,217,145.00

The entry in question is accompanied by company-prepared worksheets which include a column marked as "Duty Free Overhead @ HK $ 18.876 Per Man Hour" [sic]. It is reported that Customs will be receiving eight other entries which can be expected to include this cost category and we are asked to rule upon the dutiable status of such "overhead" charges.

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 and unspecified "overhead" charges such as those included in the entry under consideration must be considered dutiable.

CF 226 ITEM 4 VESSEL CLEANING......................$ 4,350.00

This item appears to involve vessel cleaning performed pursuant to vessel repairs. Absent evidence to the contrary, the cost of this item ($ 4,350.00) is dutiable.

HOLDING:

Following a thorough review of the evidence submitted as well as analysis of the applicable law and precedents, we have determined that the Application for Review should be allowed in part and denied in part as set forth in the Law and Analysis portion of this ruling.

Sincerely,

Acting Chief
Carrier Rulings Branch