VES-13-18-OT:RR:BSTC:CCI H035597 JLB
Supervisor
Vessel Repair Unit
U.S. Customs and Border Protection
1515 Poydras Street, Suite 1700
New Orleans, Louisiana 70112
RE: Protest No. 4909-08-100015; Vessel Repair Entry No. C49-0024471-5; CSX HAWAII; V-186; 19 U.S.C. § 1466; Proration; Cleaning; Survey; Modification; 19 U.S.C. § 1466(d)(2)
Dear Sir:
This is in response to your memorandum of July 6, 2008, forwarding the above-referenced application for further review. We have reviewed the arguments set forth by your office and by the protestant, Horizon Lines, LLC. Our decision follows.
FACTS
The subject protest involves shipyard work undergone by the CSX HAWAII. The vessel is currently owned and operated by Horizon Lines, LLC. On February 24, 2000, the vessel arrived at the Hyundai MIPO Dockyard Co. Ltd. in Ulsan, Korea for various shipyard work and returned to the United States at the port of San Juan, Puerto Rico on April 24, 2000. A vessel repair entry was timely filed.
Horizon Lines, LLC filed an application for relief of the vessel repair duties assessed on the costs covered in the subject vessel entry. In response thereto, your office issued a decision on December 19, 2007, which denied in part, and granted in part, the application for relief. Accordingly, your office assessed vessel repair duties in the amount of $562,340.67. A timely protest was filed thereto for the duties assessed for numerous items.
ISSUE
Whether the costs for which the protestant seeks relief are subject to duty under 19 U.S.C. § 1466?
LAW AND ANALYSIS
Pursuant to 19 U.S.C. § 1466(a), there must be a 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 engage in such trades. In its application of the vessel repair statute, U.S. Customs and Border Protection (“CBP”) has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. The factors considered in identifying work constituting modifications, vis-à-vis work constituting repairs, have evolved from judicial and administrative precedent. See Otte v. United States, 7 Ct. Cust. Appls. 166, Treasury Decision (T.D.) 36489 (1916); United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137, Treasury Decision (T.D.) 44359 (1930); see also Cust. Bull. and Dec., Vol. 31, No. 40 (Oct. 1, 1997). These factors include:
1. Whether there is a permanent incorporation into the hull or superstructure of a vessel.
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.
These factors are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a given case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue of whether certain work may be a modification of a vessel which is non-dutiable under 19 U.S.C. § 1466.
Invoice 3
The invoice for the work performed merely states “Clean the No. 16 (P&S) side F.O.T. tank” prior to dry docking. See Sampson Marine Services Co., Ltd. Voucher. CBP 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. See, e.g., Headquarters Ruling Letter 111204, dated December 7, 1990; Headquarters Ruling Letter 112124, dated March 14, 1995. See also Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (1994).
The burden rests on the protestant to establish, by adequate, clear, and satisfactory documentary evidence, that an item is non-dutiable under 19 U.S.C. § 1466. See Headquarters Ruling Letter 116462, dated May 16, 2005. The protestant argues that there is no evidence presented in the invoice or the ABS report that the fuel tank was repaired. See Protest at 2. Our review of the record indicates, however, that no explanation was provided as to the condition of the tank prior to the cleaning, the method by which the tank was cleaned or the purpose of the work. Accordingly, since insufficient documentation was provided, the cleaning is dutiable.
Invoice 11a: Items 1.1, 1.2, 1.4, 1.5, 1-6, 1.7, 1.9, 1.10, 1-13(a), 1-14(a), 1.16(a), 1.18, 1.20, 1.23, 1.18c, 1.16c, 2.1, 6.13-a, 6.13-b
In SL Service, Inc. v. United States, 357 F.3d 1358 (Fed. Cir. 2004), rev’g 244 F.Supp. 2d 1359 (Ct. Int’l Trade 2002), cert. denied December 13, 2004, the Court of Appeals for the Federal Circuit upheld CBP’s proration of certain expenses. The court stated in pertinent part as follows:
…apportionment is consistent with section 1466(a) and the "but for" test. In the context of dual-purpose expenses, it is rational to impose the duty on only that portion of the expense that is fairly attributable to the dutiable repairs. Indeed, to impose the 50% ad valorem duty on the entire costs of dry-docking in this case would exceed the mandate of the statute. The logical appeal of apportionment has been recognized in other areas of the law…Customs’ [now CBP] long-standing practice of apportioning the cost of various expenses between dutiable repairs and non-dutiable inspections and modifications comports with both the statute and common sense.
See, e.g., Headquarters Ruling Letter 113474, dated October 24, 1995; Headquarters Ruling Letter 112045, dated March 10, 1992. The Vessel Repair Unit (“VRU”) held all the general services on this invoice were “dual purpose expenses,” and consequently were dutiable on a prorated basis. The protestant contends that the shipyard segregated the dry docking expenses by providing different invoices for expenses related to inspections, modifications, and repairs. Therefore, the protestant states that since invoice 11a only contains the general services and dry docking expenses applicable to non-dutiable inspections, these items should be held completely non-dutiable.
It is CBP’s longstanding position that duties will not be remitted in the absence of segregation of dutiable and non-dutiable costs. See C.I.E. 1325/58; C.I.E. 565/55; Headquarters Ruling Letter 112024, dated February 3, 1992; Headquarters Ruling Letter 111622, dated December 11, 1991. If the invoice clearly differentiates the non-dutiable ABS inspections from dutiable repairs, this segregation of expenses provides substantial evidence that the general services and dry docking costs in question are incurred solely in conjunction with non-dutiable ABS inspections, thus the costs are non-dutiable. See Headquarters Ruling Letter 115539, dated January 24, 2001. While the shipyard invoice in this case purportedly segregated the expenses that the protestant claims are solely related to inspections, we found that there was insufficient evidence that all of the inspections in question were non-dutiable ABS inspections, thus the costs should be prorated.
Invoice 11a: Items 2.1-16, 2.1-20, 2.1-22, 3.2-16, 4.1-2, 4.1-5, 4.1-9
CBP has held that inspections not resulting in repairs are not dutiable. See American Viking Corp. v. United States, 37 Cust. Ct. 237, 247, C.D. 1830 (1956); Headquarters Ruling Letter 110395, dated September 7, 1989. Where periodic surveys are undertaken to meet the specific requirements of, for example, a classification society or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. See Customs Service Decision (C.S.D.) 79-277. 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. 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. See C.I.E. 429/61; C.S.D. 79-2, 13 Cust. Bull. and Dec. 993 (1979); C.S.D. 79- 277, 13 Cust. Bull. and Dec. 1395, 1396 (1979).
In this case, insufficient documentation was provided to demonstrate that the inspections were required by the American Bureau of Shipping (“ABS”). The mere labeling of the test as part of a “survey” is ambiguous. The invoice has a handwritten notation after each item that states “regulatory required inspection” but makes no mention of the ABS or the presence of an ABS surveyor. See Hyundai Mipo Dockyard Co., Ltd. Invoice 11a at Items 2.1-16, 2.1-20, 2.1-22, 3.2-16, 4.1-2, 4.1-5, 4.1-9. Specifically, the invoice at item 2.1-22 notes that the survey was performed by an “owner arranged service technician” and for item 4.1-2, that the survey was performed by the “owner’s technical representative” but neither makes any mention of an ABS surveyor. See Hyundai Mipo Dockyard Co., Ltd. Invoice 11a at Item 2.1-22, 4.1-2. Additionally, none of the work performed is mentioned in the ABS survey report. See ABS Report at Invoice 14. Consequently, these items are held dutiable.
Invoice 11a: Item 4.1-11
CBP has held that the cleaning of a switchboard unrelated to any dutiable repair work does not constitute a dutiable maintenance operation. See Headquarters Ruling Letter 116492, dated June 27, 2005, quoting Headquarters Ruling Letter
115603, dated May 16, 2002; Headquarters Ruling Letter W116467, dated
July 7, 2006. Examinations and inspections to determine the condition of an item and to ascertain whether repairs are necessary, but where no repairs result, are non-dutiable. See Headquarters Ruling Letter 109569, dated December 12, 1989; Headquarters Ruling Letter 110047, dated December 15, 1989.
CBP has previously found that “switchboard panels, vacuum cleaned and checked tightness of all connections" is a non-dutiable operation. See Headquarters Ruling Letter W116467, dated July 7, 2006; Headquarters Ruling Letter 112124, dated March 14, 1995; Headquarters Ruling Letter 116492, dated June 27, 2005. In this case, the shipyard invoice of the work performed includes the following description: “...[o]pened up switchboard panels, vacuum clean all bus hardware and wiring. Check tightness of all connections. Racked out and inspected all large circuit breakers for pitting or burned spots on contacts…” See Hyundai Mipo Dockyard Co., Ltd. Invoice 11a at item 4.1-11. Accordingly, this item is held to be non-dutiable.
Invoice 11b: Items 1.1, 1.2, 1.4, 1.5, 1.6, 1.7, 1.9, 1.10, 1-13a, 1-14a, 1.16a, 1.18, 1.23, 1.18c, 1.16c, 2.1, 6.13-a, 6.13-b
The VRU held these general services dutiable on a prorated basis. The protestant contends, just as in Invoice 11a, that the shipyard segregated the general services and dry docking expenses. Therefore, they assert that since Invoice 11b only relates to modifications, the expenses should be held completely non-dutiable rather than dutiable on a prorated basis. However, we have held that several items do not constitute modifications, instead they are dutiable repairs. Accordingly, the costs at issue should be prorated.
Invoice 11b: Item 3.2-9
To determine whether a particular replacement is a modification as opposed to a repair, the appropriate inquiry is to analyze the condition of the structure prior to being replaced. See Headquarters Ruling Letter 112926, dated November 29, 1993. CBP has held that the removal of an existing operational system to improve the efficient performance of the vessel is not dutiable if the work was not performed in conjunction with dutiable repairs. See Headquarters Ruling Letter 109971, dated June 12, 1989. If a permanent addition is a first-time installation, or if it replaces an existing structure that is in good working order at the time of its replacement and an enhancement in operating efficiency is provided, the operation may be considered a non-dutiable modification. See Headquarters Ruling Letter 111224, dated Feb. 19, 1991. If the work done involves an element of repair due to damages, deterioration or wear and tear then it is a dutiable repair. See Headquarters Ruling Letter 110569, dated April 12, 1990.
In this case, “the ring of the forward most lip seal has been found to allow oil to escape from the seal arrangement” so the seal retaining ring was altered to allow an o-ring to be added to prevent oil leakage between the seal housing and the retaining ring. See Memorandum from Port Engineer at 1, Exhibit E. The protestant maintains that adapting the valve control constitutes a modification, however, there is insufficient documentation to verify this claim.
Unlike in the precedent cited by the protestant, a detailed description of the work performed was not provided to illustrate that the stern tube seals were inspected and found to be in good condition before they were converted. See Headquarters Ruling Letter 227073, dated March 18, 1998 (held that the inclusion of an o-ring to prevent the leakage of any oil from a stern tube seal was not dutiable since the stern tube seals were converted while they were in good condition and to enhance the running time of the vessel). The invoice does not provide a reason for or a detailed description of the work performed. In fact, the only evidence submitted to demonstrate that the seals were converted to enhance efficiency is an inter-office memorandum. See Memorandum from Port Engineer at 1, Exhibit E. We have previously held that internal memorandums are not sufficient evidence. See Headquarters Ruling Letter 111942, dated March 15, 1995 (an internal memorandum is not sufficient evidence and thus, the work in question was held to be dutiable). Accordingly, this item is held dutiable.
Invoice 11b: Item 4.2-3
The work performed on the main circulator pump altered the seal of the pump from an M seal to a gland-type seal. See Hyundai Mipo Dockyard Co., Ltd. Invoice 11b at item 4.2-3. The protestant asserts that the new seal is more efficient than the M type seal in that it prevents normal water leakage from entering engine room spaces and increases the longevity of pump parts. See Memorandum from Port Engineer at 2, Exhibit E. As discussed above, since the inter-office memorandum was the only documentation offered, the work in question is held to be dutiable.
Invoice 11b: Item 7.1-1
The protestant does not challenge that the rudder was repaired and agrees with the VRU’s assessment that the costs incurred to restore the rudder to good working condition are dutiable. They assert, however, that the manufacturing and installation of new rudder pintle structures which are designed to improve the vessel’s movement, to provide a more reliable rudder structure and to ensure a safer vessel operation constitute a modification. See Protest at 10-11. In the protestant’s inter-office memorandum, it is explained that the single fairing was replaced by two brackets and additional structural components were hardened in order to “reduce the likelihood of fractures in its structure” caused by the “original design of the rudder.” See Memorandum from Port Engineer at 2, Exhibit E.
If shipyard services are sought in order to address a deficiency in a vessel then the fact that the component replaced is of improved design or results in increased efficiency or performance is not relevant. See Headquarters Ruling Letter 114140, dated November 18, 1997. Work performed to correct a problem, deficiency, or state of disrepair is dutiable under 19 U.S.C. § 1466. CBP has previously held that welding previously non-existing brackets to add strength to longitudinal hatch coamings in order to eliminate the flexing of the covers and the fracturing of the sockets constitutes work performed to correct a deficiency and is thus dutiable. See Headquarters Ruling Letter 114302, dated March 25, 1998. Accordingly, the expenses incurred to install the new rudder structures in this instance are dutiable.
Invoice 11b: Items 8.16a, 8.17-11, 8.1-11a, 8.1712-a, 8.1712-b
The protestant agrees with the VRU’s assessment that the costs incurred to restore the hatch covers, their brackets and bars to good working condition are dutiable repairs. See Protest at 11. However, the protestant states that the hatch cover internals, i.e. the sockets, coaming tops, guides, setting bars, and hatch cover dogs, had to be replaced to ensure a solid structure and thus constitute a modification. In the inter-office memorandum, however, it is noted that the “light weight design of transverse coaming tops on the CSX HAWAII had been found to be inadequate” and that “[t]hese problems were realized to be a safety and maintenance problem with the potential for effecting the seaworthiness of the vessel.” See Memorandum from Port Engineer at 4, Exhibit E. Given the circumstances under which the work was performed, to correct a deficiency, these items are held dutiable.
Invoice 11b: Item 8.2090.13-c
Our review of documentation submitted to determine whether a modification exists depends to a great extent on the detail and accuracy of the drawings and invoice descriptions of the actual work performed. See Headquarters Ruling Letter 111554, dated October 11, 1991; Headquarters Ruling Letter 113233, dated February 23, 1996. Here, while the protestant claims that modifying the suction line of the dump tank constitutes a modification, the invoice description is lacking sufficient detail. The invoice merely states “modified suc’ line of dump tank (P&S)” and “modified suction line from of dump tanks” making it unclear whether the line was defective and had to be replaced or if it constitutes an improvement and therefore, a modification. See Hyundai Mipo Dockyard Co., Ltd. Invoice 11b at item 8.2090.13-c. Consequently, due to the insufficient documentation provided, the work is held dutiable.
Invoice 11b: Item 5.1-13
Where periodic surveys are undertaken to meet the specific requirements of, for example, a classification society or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. See Customs Service Decision (C.S.D.) 79-277. While the invoice merely provides
that the costs are associated with “services for boiler inspection,” (see Hyundai Mipo Dockyard Co., Ltd. Invoice 11b at item 5.1-13), the ABS report indicates that there was a non-dutiable inspection of the boiler and repairs resulted. See ABS Report at Invoice 14. Accordingly, we agree with the VRU’s recommendation that this inspection be held non-dutiable.
Invoice 12
The protestant contends that it has been determined that tugs, port dues and pilotage are single-purpose, non-dutiable expenses because they are not related to repairs and are “an inevitable expense of a mandatory inspection.” CBP, however, has subsequently held that towage and any related expenses are “dual-purposes expenses” pursuant to SL Service, Inc. given that towage costs are not solely due to a non-dutiable inspection but are a required prelude to vessel repairs. As such, we have found that the cost of towage is analogous to the costs of dry-docking in that the expense was incurred in order to facilitate both dutiable and non-dutiable work. See Headquarters Ruling Letter W116467, dated July 7, 2006; Headquarters Ruling Letter 116418, dated May 10, 2005. As a result, the towage and related expenses should be prorated.
Invoice 14
Surveys conducted of non-dutiable modifications are likewise held to be non-dutiable. See Headquarters Ruling Letter 112851, dated March 22, 1996. The protestant thus asserts that this expense should be held to be non-dutiable. However, given that we have held some of the items surveyed to be dutiable repairs and other items to be non-dutiable, we agree with the VRU’s recommendation that these costs be prorated.
Invoice 24
Pursuant to 19 U.S.C. § 1466(d)(2), a duty may be remitted if good and sufficient evidence is provided establishing “such equipments…were manufactured or produced in the United States, and the labor necessary to install such equipments or to make such repairs was performed by residents of the United States, or by members of the regular crew of such vessel.” Therefore, a two-prong test must be met with respect to granting duty-free treatment to the installation of equipment: (1) U.S. manufacture or production must be established, and (2) the labor must have been performed by U.S. residents or members of the regular crew of the vessel.
The VRU held that the second prong of the test, labor performed by U.S. residents, had not been met. The application for relief did not include proof of the U.S. residency of any of the technicians who performed this work. However, the protestant has now provided a letter from the U.S. vendor confirming that the supervisory technician is a U.S. resident. Accordingly, we agree with the VRU’s recommendation that the expenses pertaining to the U.S. resident are non-dutiable. The protestant concedes that the other technicians were not U.S. residents at the time the work was performed, thus, the remaining expenses in this invoice are held dutiable.
HOLDING
After a thorough review of the record, the protest is denied in part and granted in part as detailed above.
In accordance with the Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 26 and 29), you are to mail this decision, together 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 make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Glen E. Vereb, Chief
Cargo Security, Carriers and Immigration Branch