VES-13-18-OT:RR:BSTC:CCI H031319 JLB
Supervisory Import Specialist
Vessel Repair Unit
U.S. Customs and Border Protection
1515 Poydras Street, Suite 1700
New Orleans, Louisiana 70112
RE: Protest No. 2002-08-100152; Vessel Repair Entry No. NK7-0200095-2; LIBERTY SUN: V-95; Proration; 19 U.S.C. § 1466
Dear Sir:
This letter is in response to your memorandum of June 13, 2008, forwarding the above-referenced protest for further review. We have reviewed the comments set forth by your office and by the protestant, Liberty Maritime Corporation. Our decision follows.
FACTS
The subject protest involves foreign shipyard work undergone by the U.S.-flag vessel LIBERTY SUN. The vessel is currently owned and operated by Liberty Sun Corporation. On May 22, 2006, the vessel arrived in Jiangyin, China for shipyard work and returned to the United States at the port of Houston, Texas on July 14, 2006. A vessel repair entry was timely filed. On May 9, 2008, your office issued a determination of duty in the amount of $375,922.56. A timely protest was filed for the duties assessed.
ISSUE
Whether the foreign repairs performed on the vessel for which relief is sought are dutiable 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 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 U.S. Customs and Border Protection’s (“CBP”) 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 general services in this particular case are described as “riggers, pilots, tugs, launch, diver, gangway, wharfage and line handlers, to guide the ship into drydock, and tie up at pier.” See Chengxi Shipyard invoice at item 1. The Vessel Repair Unit (“VRU”) held all these general services dutiable on a prorated basis because they are “dual purpose expenses.” Protestant disagrees with the proration. An examination of the invoice indicates that the general service costs were incurred in conjunction with both dutiable and non-dutiable work performed while the vessel was in its scheduled dry dock. Thus, the costs at issue should be prorated.
Item 120: Ballast Tank Inspection
This item is part of the Chengxi Shipyard invoice. The costs consist of the first four line items, which are “Manhole opened/closed for TST No.1-5#,” “Bottom plug opened/closed,” “Provide cherry picker service,” and “Ultrasonic thickness measurement.” See Chengxi Shipyard invoice at item 120. The protestant concedes that the VRU correctly held all the line items dutiable since the ABS report was not included in the Application for Relief but asserts that since the report has now been included with the protest both the cost of the ABS inspection and the shipyard costs associated with the inspection should be non-dutiable. We note that those seeking a non-dutiable determination regarding ABS surveys must submit both the invoice and the corresponding report. See Headquarters Ruling Letter 112202, dated May 20, 1992; Headquarters Ruling Letter 110710, dated July 13, 1990. Accordingly, we concur with the VRU recommendation that the actual cost of the inspection be held non-dutiable as the ABS report has now been provided.
The VRU recommends that the shipyard costs associated with the ABS inspection be held dutiable on a prorated basis though because they relate to both dutiable repairs as well as the non-dutiable inspection. We note that dutiable repairs were performed on the top side ballast tanks (“TST”). Item 610, the cost of “TST/DBT manhole cover stud/cover renewal,” has been conceded to be a dutiable repair by Liberty Maritime Corporation. See id. at item 610. Additionally, the top side ballast tanks were “locally descaled at this time and hard coatings partly restored” by request of the owner’s representative. See ABS Class Survey Report at 141. The shipyard work necessary for such restoration, which the protestant also conceded was dutiable, consisted of “Rusted area chipped, cleaned and washed with fresh water and applied 3 coats of paint.” See Chengxi Shipyard invoice at item 802.4. In order to complete either of these dutiable repairs, it is necessary for the manhole to be opened and closed, the bottom plugs to be opened and closed, and the cherry picker service. Accordingly, these three line items should be prorated as “dual purpose expenses.”
As for the final line item, the ultrasonic thickness measurement, the ABS report indicates that these measurements were performed for the Special Periodical Survey Hull. See ABS Class Survey Report at 225. Consequently, this shipyard cost is non-dutiable as it was required by the periodic survey.
Item 422: Crane Testing
This item is listed on the Chengxi Shipyard invoice and is separated into six line item costs. The first two line items indicate that the “store’s crane” and “E/R crane” equipment were load tested only “in the presence of the Owner’s representative.” See Chengxi Shipyard invoice at item 422. It is specifically mentioned, however, that for the other four items the testing was performed for “ABS Recertification” and was conducted in the presence of both “the Owner’s Representative and ABS surveyor.” See id. The VRU recommends that the two tests performed merely for the owner’s representative, without the presence of the ABS surveyor, remain fully dutiable but that relief be granted on the four remaining items.
CBP has held that inspections not resulting in repairs are not dutiable. See, e.g., American Viking Corp. v. United States, 37 Cust. Ct. 237, 247, C.D. 1830 (1956); Headquarters Ruling Letter 112222, dated May 27, 1992; Headquarters Ruling Letter 112128, dated June 29, 1992. 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. C.S.D. 79-277; Headquarters Ruling Letter 112444, dated May 22, 1996; Headquarters Ruling Letter 114034, dated October 16, 1998; Headquarters Ruling Letter 112378, dated November 30, 1992. 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. C.I.E. 429/61; C.S.D. 79-2, 13 Cust. B. & Dec. 993 (1979); C.S.D. 79- 277, 13 Cust. B. & Dec. 1395, 1396 (1979).
The simple fact that a classification society is involved in a survey does not, in and of itself, render all inspection costs non-dutiable. We note that we have held that a required and periodic survey by a classification society or government agency is non-dutiable if the costs of the survey are separately itemized. See Headquarters Ruling Letter 113161, dated July 20, 1994. Vessel owners have increasingly been seeking relief not only from charges on the ABS invoice (the actual cost of inspection) but also for inspection-related charges appearing on the shipyard invoice. The cost of a periodic survey though is only non-dutiable if paid to a classification society or insurance carrier to meet the specific requirements of a survey. If the cost was instead paid to the shipyard, then the inspection costs are dutiable. See Headquarters Ruling Letter 112146, dated June 4, 1992; Headquarters Ruling Letter 112045, dated March 10, 1992; Headquarters Ruling Letter 112128, dated June 29, 1992; see also C.S.D. 79-277 (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 is exempt from duty). Accordingly, the crane tests performed merely for the owner’s representative (the first two line items) are dutiable. The four remaining line items, where the ABS representative was present, are held to be non-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 (CIS HB, January 2002, pp. 18 and 21), 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 recalculation of duties 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