VES-13-18-CO:R:IT:C 112869 GOB

Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90831

RE: Vessel Repair Petition; 19 U.S.C. 1466; PRESIDENT GRANT, V-120; Entry No. 110-0104128-1; Overhead; Repairs; Propeller Work; Cleaning; Transportation

Dear Sir:

This is in response to your memorandum dated August 4, 1993, which forwarded the petition submitted by American President Lines, Ltd. ("petitioner") with respect to the above-referenced entry.

FACTS:

The vessel PRESIDENT GRANT ("vessel") arrived at the port of Seattle, Washington on February 14, 1992 and filed a timely vessel repair entry. The vessel underwent foreign shipyard work in Taiwan and Hong Kong during January and February of 1992.

By Ruling 112480 dated March 16, 1993, Customs allowed in part and denied in part the application for relief with respect to this entry.

Petitioner's Claims

The petitioner contends that certain overhead costs are not dutiable. In support of its claim, the petitioner cites Ruling 108953 dated January 7, 1988 and Ruling 109308 dated May 26, 1988. It has performed a "Billing Rate Analysis" which constructs a billing rate which includes the following three elements: direct labor cost, overhead, and margin and profit.

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The petitioner also requests relief with respect to the following items:

Item 2.1-7 Anchor Chains/Locker Item 2.1-8 Sea Valve Inspection Item 2.1-9 Sea Chest Strainers Item 2.1-10 Propeller Item 2.1-11 - 2.2-2 Inspection Items Item 3.1-1 Hull Cleanings Item 3.1-2 Temporary Protection Item 3.1-7 Sea Chest Strainer Studs Item 3.1-10 Sea Valve Repairs Item 3.3-1 Hatch Covers Item 4.1-11 Testing Ballast System Item 4.1-12 H.P. Turbine Inspection Item 4.1-12 Main Steam Strainer Item 5.1-7 Starb. Boiler Bottom Casing Seal

ISSUE:

Whether the costs at issue are dutiable pursuant to 19 U.S.C. 1466.

LAW AND ANALYSIS:

19 U.S.C. 1466 provides for the payment of duty at a rate of fifty 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.

Overhead

In Ruling 112861 dated October 19, 1993, Customs considered the issue of the dutiability of overhead. In that ruling, we stated:

It is Customs position that overhead relating to repair work is dutiable as part of the cost of the repair. Overhead is part of the shipyard's cost of doing business. The total shipyard cost of each repair is dutiable; that total cost includes overhead.

Customs does not wish to see overhead broken-out or segregated as a separate item. Customs believes that overhead should be included within the cost of the work performed, whether that work be a dutiable repair or a nondutiable modification. As stated supra, the total shipyard cost of each repair item is dutiable; that cost includes overhead.

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In support of its position that the overhead is nondutiable, the petitioner has cited two previous rulings, Ruling 109308 dated May 26, 1988 and Ruling 108953 dated January 7, 1988.

In Ruling 112214 dated September 16, 1992, Customs stated as follows with respect to the overhead issue:

Upon further review of this matter, we are of the opinion that our interpretation of T.D. 55005(3) as set forth in ruling 111170 and discussed above is correct. Accordingly, rulings 108953 and 109308 are hereby modified to hold that the costs of "overhead" and/or "administrative" charges as described therein are dutiable in their entirety in the absence of an apportionment of such expense between dutiable and non-dutiable work.

The two rulings cited by the petitioner, Ruling 109308 and Ruling 108953, are not, and were not at the time they were issued, accurately reflective of Customs position. These two rulings were effectively overruled by Ruling 112214. In the subject case, the petitioner's claim for relief on this issue is granted with respect to any overhead charges which are associated with nondutiable charges and which are clearly reflected as such on the pertinent invoices. The petition is denied with respect to all other overhead charges. [End of excerpt from Ruling 112861.]

Thus, as stated in Ruling 112861, Ruling 109308 and Ruling 108953 were effectively overruled by Ruling 112214, which was not cited by the petitioner in the subject case, nor was it cited by the petitioning party in its petition in the case involving Ruling 112861.

As we stated in Ruling 112861, supra, it is Customs position that overhead relating to repair work is dutiable as part of the cost of the repair, i.e., the total cost or expense of the repair is dutiable. In contrast, overhead relating to a nondutiable item such as a modification is nondutiable, i.e., the total cost or expense of a nondutiable item is nondutiable. While Customs does not wish to see overhead broken-out or segregated as a separate item, our position on the dutiability of overhead, as stated supra, holds whether or not overhead is a separate item.

Our position herein is consistent with numerous rulings issued in recent years, e.g., Ruling 112861 and Ruling 112214, both cited supra. See also Ruling 111170 dated February 21, 1991, which was cited in Ruling 112480 (the ruling on the application for this vessel repair entry), and subsequent rulings which cite Ruling 111170.

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Accordingly, the petitioner's claim for relief is granted with respect to any overhead charges which are associated with nondutiable charges and which are clearly reflected as such on the pertinent invoices. The petition is denied with respect to all other overhead charges.

Additional Items After a careful review of the evidence of record, we find that the following items are nondutiable inasmuch as the record reflects that they are not repair items: item 2.1-7; item 2.1-8; item 2.1-9; items 2.1-11 through 2.2-2; item 4.1-11; and item 4.1-12 (H.P. turbine inspection); and item 4.1-12 (main steam strainer).

With respect to item 3.1-10, we find that job no. 259 is nondutiable because it is not a repair.

With respect to item 3.1-7, we find that job no. 235 is a dutiable repair; we find that job nos. 088 (sea chest strainer studs) and 211 (outboard corner of main scoop) are nondutiable because they are not repairs.

We find that the following items are dutiable repairs: item 2.1-10; item 3.1-1; item 3.1-2; item 3.3-1; and item 5.1-7.

We affirm the finding of our ruling on the application for this entry, referenced supra, that the propeller work in item 2.1-10, including waterblasting and the polishing of propeller blades, is dutiable maintenance. Our reasoning was thoroughly described in our previous ruling.

The "Hull High Pressure Water Wash" in item 3.1-1 is dutiable because it is cleaning in preparation for dutiable repairs, i.e., hull gritblasting and painting.

Item 3.1-2, which is described on the invoice as "temporary plywood on main deck" and "temporary covers" is dutiable. The Court of Appeals for the Federal Circuit in Texaco Marine Services, Inc. v. United States, Case No. 93-1354, decided December 29, 1994, held that the cost of protective coverings related to repairs is dutiable under 19 U.S.C. 1466.

The petitioner contends that two of the charges (HK$1,440 and HK$55,100) under item 3.3-1 for Hatch Cover Repairs are nondutiable because they are crane and transportation costs. We find that these costs are dutiable. The record does not reflect that these costs are solely for transportation and cranage. As we stated in our previous decision in this case, it is Customs position that "transportation" does not include operations relative to preparing an item for shipping. Labor for work such as removing

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a part from its housing or mounting, or disconnecting an item, is not transportation. Such labor is dutiable.

The petitioner claims that a charge in the amount of HK$4,050 in item 5.1-7 is nondutiable because it does not involve any repair. We find that that charge is dutiable as a component of dutiable repairs.

HOLDING:

The petition is granted in part and denied in part, as detailed supra.


Sincerely,

Arthur P. Schifflin
Chief
Carrier Rulings Branch