VES-13-18-CO:R:IT:C 111793 LLB
Chief, Technical Branch
Commercial Operations Division
Pacific Region
One World Trade Center
Long Beach, California 90731
RE: Vessel repair; Modification; Repair; Segregation of costs;
Warranty; Vessel PRESIDENT ADAMS, V-25; Entry No. C27-
0054133-0
Dear Sir:
Reference is made to your memorandum of July 15, 1991, which
forwards for our consideration the Application for relief from
the assessment of vessel repair duties submitted by American
President Lines, Ltd., in regard to the above-captioned vessel
repair entry.
FACTS:
The vessel PRESIDENT ADAMS arrived at the port of San Pedro,
California, on March 23, 1991, and filed a timely vessel repair
entry. The vessel had just arrived from Singapore where it
underwent extensive repair and modification procedures. We are
requested to consider the dutiable character of numerous items,
and to address two general questions as well. These general
questions, which may have broad impact, are whether a cost
category listed as "overhead" and represented as a flat
percentage of each enumerated shipyard operation may be
considered as non-dutiable, and whether a particular method of
listing staging charges is sufficient to qualify the charges as
non-dutiable. The particular operations under consideration are
listed in the Application and in the incoming Customs
documentation as items 1 through 25. In making our determination
we will refer to this same numbering scheme.
ISSUE:
Whether certain foreign shipyard procedures and costs,
including overhead charges, are considered subject to duty, and
whether certain invoicing practices regarding staging charges are
sufficient to allow remission of duty on those costs.
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.
Over the course of years, the identification of modification
processes has evolved from judicial and administrative precedent.
In considering whether an operation has resulted in a
modification which is not subject to duty, various elements may
be considered. In all cases, modification costs must be fully
segregated from other charges, since mixed repair/modification
charges are assessed duty.
1. Whether there is a permanent incorporation into the hull or
superstructure of a vessel (see United States v. Admiral Oriental
Line et al., T.D. 44359 (1930), either in a structural sense or
as demonstrated by the means of attachment so as to be indicative
of the intent to be permanently incorporated. This element
should not be given undue weight in view of the fact that vessel
components must be welded or otherwise "permanently attached" to
the ship as a result of constant pitching and rolling. In
addition, some items, the cost of which is clearly dutiable,
interact with other vessel components resulting in the need,
possibly for that purpose alone, for a fixed and stable
juxtaposition of vessel parts. It follows that a "permanent
attachment" takes place that does not necessarily involve a
modification to the hull and fittings.
2. Whether in all likelihood, an item under consideration would
remain aboard a vessel during an extended layup.
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.
In the case of Sea-Land Service, Inc. v. United States, 683
F. Supp. 1404 (1988), the Court addressed whether repair work
performed on a newly constructed vessel subsequent to its
delivery to the owner might be considered to be part of the new
construction contract. Simply put, the Court considered whether
"completion of construction" is a viable concept so as to render
the duty provisions of 19 U.S.C. 1466(a) inapplicable if proven.
The Court found completion of new construction to be a valid
concept, subject to specific conditions, which are:
1. "All work done and equipment added [must be] pursuant
to the original specifications of the contract for the
construction of the vessel ...."
2. "This basic standard is limited to work and equipment
provided within a reasonable period of time after
delivery of the vessel."
The contract for construction of the vessel under
consideration in that case contained clauses guaranteeing for
twelve (12) months any area of the vessel for which the builder
accepted responsibility under the contract and specifications,
conditioned upon written notification from the owner of any
covered defect within the agreed upon 12-month period.
In reviewing the warranty case on remand from the Court,
Customs had the opportunity to review the contract, the
specifications, and a so-called "guarantee notebook." This
document consisted of numerous guarantee items, some generic in
nature and some specific, and represented the written
notification of defects from the owner to the builder as required
by the contract. In that case, we found that the court-ordered
criteria had been satisfied and that the "reasonable period of
time" for the warranty period was the one-year period specified
in the contract. We have since held likewise in similar cases,
and have adopted the one-year limit as the benchmark for honoring
new construction warranties which otherwise qualify.
After reviewing the evidence regarding the specific items
submitted for our consideration we find that they represent
modification procedures, with the following exceptions:
Item (1) Work on the bow. (Unsegregated repair costs mixed with
modification operations).
Item (4) Ballast tank work. (Warranty claim of duty-free work
extending under the contract for 30 months is beyond
the reasonable time standard established by the Court
in the Sea-Land warranty case, discussed above. The
operation involves a maintenance operation which is
dutiable).
Item (5) Hatch coamings and covers. (Includes unsegregated
repair costs, thus rendering the entire item
dutiable).
Item (7) Longitudinal coaming termination. (Includes
unsegregated repair costs).
Item (19) Main engine lube oil cooler. (Unsegregated repairs
included).
The entry in question is accompanied by company-prepared
worksheets which include a column marked as "Duty Free Overhead @
8$ 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 are included in the entry under consideration are considered
dutiable.
The final matter presented for consideration concerns the
manner of invoice preparation. In otherwise unsegregated
shipyard items, a price for the item is listed first, and
staging costs are reported further into the invoice. It is not
possible to tell whether the staging cost associated with a
particular item is included in the price listed at the top of
representative invoice items, or is a separate cost. Since it is
not possible to tell how to calculate liquidation figures based
on the subject scheme, we find this method to be inappropriate.
The staging costs are, therefore, considered 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,
B. James Fritz
Chief
Carrier Rulings Branch