VES-3-18-OT-RR:BSTC:CCI H188678 WRB
Supervisory Import Specialist
C/o Vessel Repair Unit
U.S. Customs and Border Protection
423 Canal Street
Suite 246
New Orleans, LA 70130
RE: 19 U.S.C. §1466; Vessel Repair Entry C20-0040768-7; TSGT JOHN A. CHAPMAN; Protest No. 2002-11-100066; Proration; Survey
Dear Sir:
This is in response to your memorandum of October 3, 2011, forwarding for our review the protest filed on behalf of Sealift LLC, (hereinafter “protestant”) with respect to Vessel Repair Entry C20-0040768-7. Our ruling is set forth below.
FACTS:
The M/V TSGT JOHN A. CHAPMAN is an American-flag vessel. The vessel had repairs and shipyard services rendered to it at the Viktor Lenac Shipyard in Rijeka, Croatia.
ISSUE:
Whether the costs for which the protestant seeks relief are dutiable, non-dutiable, or remissible under 19 U.S.C. § 1466?
LAW AND ANALYSIS:
Initially, we note that the information in the file indicates that the protest, with application for further review, was timely filed under the statutory and regulatory provisions for protests. 19 U.S.C. § 1514(c)(3) and 19 CFR § 174.12(e).
Title 19, United States Code, section 1466(a) (19 U.S.C. §1466(a)) provides for the payment of duty at a rate of fifty percent ad valorem on the cost of foreign repairs to and equipment for 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.
In its administration of the vessel repair statute, Customs and Border Protection (“CBP”) has frequently used the following definitions:
Equipment – An article which constitutes an operating entity unto itself. Equipment retains at least the potential for portability. Equipment may be affixed to a vessel in a non-permanent fashion, such as by means of bolts or other temporary methods, which is a feature distinguishing it from being considered an integrated portion of the hull and superstructure of a vessel. Examples would include winches and generators.
Material – An item which is consumed in the course of its use and/or loses its identity as a distinct entity when incorporated into the larger whole, e.g., paint and sheets of steel.
Part – An article which does not lose its essential character or its identity as a distinct entity but which, like materials, is incorporated into a larger whole. It would be possible to disassemble an apparatus and still be able to identify a part. Examples would include piston rings and pre-formed gaskets.
In Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994), aff’g 815 F.Supp. 1484 (Ct. Int'l Trade 1993), the court stated in pertinent part as follows with respect to the reach of 19 U.S.C. § 1466:
Texaco urges us to reject the Court of International Trade’s “but for” approach and to interpret “expenses of repairs” so as to exclude those expenses (e.g., expenses for clean-up and protective covering work) not incurred for work directly involved in the actual making of repairs. Such a reading has no basis in the plain language of the statute, however. Aside from the inapplicable statutory exceptions, the language “expenses of repairs” is broad and unqualified. As such, we interpret “expenses of repairs” as covering all expenses (not specifically exempted in the statute) which, but for dutiable repair work, would not have been incurred. [Emphases supplied.]
In SL Service, Inc. v. United States, 357 F.3d 1358 (Fed. Cir. 2004), rev’g 244 F. Supp. 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 shipyard 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’ 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.
In its administration of the vessel repair statute, U.S. Customs and Border Protection (“CBP”) has held that modifications, alterations, or additions to the hull of a vessel are not subject to vessel repair duties. See, for example, HQ 111425 dated June 26, 1991, HQ 111747 dated February 19, 1992, and HQ 113127 dated June 14, 1994. The identification of work constituting modifications vis-à-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a nondutiable modification, several factors have been considered. 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 as to whether certain work may be a modification of a vessel which is nondutiable under 19 U.S.C. § 1466. The factors are:
1. Whether there is a permanent incorporation into the hull or superstructure of a vessel, either in a structural sense or as demonstrated by means of attachment so as to be indicative of a permanent incorporation. See United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930). However, we note that a permanent incorporation or attachment may not necessarily involve a modification; it may involve a dutiable repair or dutiable equipment.
2. Whether in all likelihood an item would remain aboard a vessel during an extended lay-up.
3. Whether an item constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.
4. Whether an item provides an improvement or enhancement in operation or efficiency of the vessel.
Additionally, we note that in order to qualify as a nondutiable modification, rather than as a repair, the documentation of record must reflect that the element which was replaced, if any, was in good and full working order at the time the work was performed.
You request our advice with respect to the following items:
Shipyard Invoice, Item 28:
This item, listed as Item 28 on the Viktor Lenac Shipyard invoice, covers the cost of ultrasonic hull gauging in the sum of $15,324.00. Protestant argues that this cost should be held non-dutiable because it is related to a classification society inspection. The American Bureau of Shipping (ABS) invoice and report included a Special Periodical Survey Hull and an Annual Hull Survey, both of which are non-dutiable. The report of the class compliance survey indicates that ultrasonic gauging was used as part of the survey, saying, “[f]orward stabilizer ballast tank #14, was re-examined, gauged, and renewed as necessary…,” and, “…aft ballast tank #16, was re-examined, gauged, and renewed as necessary.” Protestant submitted an excerpt from the ABS guidelines as documentation supporting its argument that ultrasonic testing was required for the ABS survey.
We find, however, references to ultrasonic thickness measurements in the ABS report in other entries as well. There was also an ABS Damage-Repair which is fully dutiable, and the protestant has not disputed the dutiability of the Damage Repair Survey. The damage survey report indicates seven times that certain areas of steel, including deck plating, side shell plating, and bulkhead, were found wasted, and that “condition was confirmed by thickness gauging.”
There is considerable jurisprudence on the question of proration between dutiable and non-dutiable inspections. 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.
Similarly, CBP, and its predecessor agency the Customs Service, has examined the dutiability of inspections a number of times. In Customs Service Decision 79-277, 13 Cust. Bull. And Dec. 1395, 1396 (1979), we stated that where a survey is undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier, etc., the cost is not dutiable even when dutiable repairs are effected as a result thereof. 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. We note, moreover, that C.S.D. 79-277 does not exempt from duty repair work done by a shipyard in preparation for a required survey. 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.
It is noteworthy that expenses for ultrasonic thickness gauging have been held to be both dutiable and non-dutiable, depending on the purpose for which performed. For example, in CBP Ruling HQ H031319, dated September 26, 2008, the expenses for ultrasonic thickness measurement performed for an ABS special periodic hull survey were held to be non-dutiable as required by a periodic survey; and, in CBP Ruling HQ H031319, ultrasonic thickness measurements required for an ABS periodic hull survey were held non-dutiable. However, in Customs Ruling HQ 113160, dated February 20, 1997, an ultrasonic test conducted to determine whether repairs were necessary or proper, not required as part of a scheduled inspection by a qualifying entity, was held to be dutiable. Similarly, in Customs Ruling HQ 109144, dated January 11, 1988, ultrasonic thickness gauging effected for the purpose of ascertaining whether repairs were required, or performed in order to ascertain whether repairs to rudder and hull plating were adequately completed, was determined to be an integral part of the repairs, and, therefore, 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 would provide substantial evidence that the ultrasonic survey costs in question were incurred solely in conjunction with non-dutiable ABS inspections. Thus the costs would be non-dutiable. See Headquarters Ruling Letter 115539, dated January 24, 2001. However, in the present matter, the shipyard invoice fails to differentiate between ultrasonic hull gauging costs associated with the non-dutiable ABS inspections and those associated with the dutiable damage survey. Accordingly, we are of the opinion that the evidence indicates that the ultrasonic hull gauging was related to both dutiable and non-dutiable ABS surveys and is properly held dutiable on a prorated basis.
Shipyard Invoice, Item 105:
The shipyard invoice for this item in the amount of $4,860.00, describes the work as, “Inspection on spot - Anchor, Anchor chains and Chains lockers (Port and Stbd).” We note that the ABS class survey reports examination of anchor chain and anchor(s) as part of the class survey. The protestant claims this item should be considered a nondutiable inspection item. CBP has long held that inspections performed by regulatory bodies for classification purposes are nondutiable expenses.
The shipyard invoice breaks down the work associated with the anchors, chains, and chain lockers into two different items. Item 105 is described as “Inspection on spot - Anchor, Anchor chains and Chains lockers (Port and Starboard).” The next item in the invoice, Item 106, in the amount of $4060, describes the work performed as “[r]anging of anchors and chains in drydock, washing with HP water jet, calibration of anchor chains and report, painting with one (1) coat Bitumastic paint yard’s supply, marking of shackles and restowing into chain lockers. Chain lockers manholes opening/closing, mud removal and disposal (tot. 5 tons), Washing down of chain lockers with HP water jet, removal gratings and suction strainers and clean, blow out bilge suction piping.” Protestant concedes that Item 106 is dutiable, and argues that Item 105 is not.
In CBP Ruling HQ H031016, dated August 6, 2008, CBP considered the same scenario as in the present matter. In that matter, the invoice included two subsections and sub-items under each section. We determined that, “[t]he inspection of the anchor chain is nondutiable, and Protestant has conceded that the separated sub-item of cleaning is dutiable.” Similarly, in HQ H099116, dated April 19, 2010, we held that it was the failure to segregate charges between between dutiable and nondutiable work performed on anchor chains demanded that duty be assessed on the full cost of the item on the invoice.
Accordingly, we find that this item is nondutiable as an item incident to a nondutiable ABS inspection, the dutiable repairs being segregated into at different item, Item 106. Accordingly, Item 105 is nondutiable.
HOLDING:
The costs for which the protestant seeks relief are nondutiable or dutiable on a prorated basis under 19 U.S.C. § 1466 as discussed in the Law and Analysis section of this ruling. You are instructed to deny the protest in part and grant the protest in part with respect to the costs discussed in this ruling.
In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2007), 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 final duty determination 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,
George Frederick McCray
Supervisory Attorney-Advisor/Chief
Cargo Security, Carriers and Immigration Branch
Office of International Trade, Regulations & Rulings
U.S. Customs and Border Protection