VES-13-18 CO:R:IT:C 112124 BEW
Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831
RE: Vessel Repair; Modification; Inspection; Warranty; 19 U.S.C. §1466; M/V PRESIDENT KENNEDY, Voyage 028; Entry No. C27-0054146-2.
Dear Sir:
This letter is in response to your memorandum dated March 3, 1992, which forwards for our review a petition for relief filed in conjunction with our ruling No. 111829 RAH relating to the above-referenced vessel repair entry. Our review of this matter has been delayed pending the outcome of on-going litigation which has now been resolved.
FACTS:
The vessel PRESIDENT KENNEDY, a U.S.-flag vessel owned and operated by American President Lines (APL) of Oakland, California, arrived at the port of San Pedro, California, on April 14, 1991. A vessel repair entry was timely filed. The vessel had just arrived from Singapore where it underwent extensive repair and modification procedures. An application for relief from duties assessed pursuant to the vessel repair statute (19 U.S.C. 1466) was timely filed. In addressing the dutiable character of numerous items, by ruling 111829 RAH, dated December 17, 1991, Customs allowed in part and denied in part the applicant's claims for relief.
The petitioner claims that the ruling was silent on the subject request for remission of duty on shipyard administrative overhead, and requests further review of the following items.
ITEM No. JSI Page No. Description
(1) 3.3-2 37 bow damage stiffening
(2) 3.3-20 58 bottom longitudinales
(3) 3.1-1 18 hull cleaning & painting
(4) 3.1-3 22 rudder edge coating
(5) 3.6-2 63 No. 4 cargo hold vent
(6) 3.6-9 65 engine room exhaust fan
(7) 3.6-20 70 service tank
(8) 3.6-21 70 wing tank
(9) 999-8 84 air filter
(10) 5.3-1 109 SSDG Exhaust pipe Extension
(11) 4.1-1 122 main switchboard
(12) 5.3-7 Main Engine L.O. Cooling Return isolution
The petitioner claims that items No. 3.3-2 and 3.3-20 are modifications, that item no. 3.6-9 and 5.3-1 are warranty items, that items Nos. 3.1.1, 3.1-3 are non-dutiable temporary lighting and staging, and that 3.6-2 is a non-dutiable cleaning.
In support of their claims for relief, the petitioner submitted a letter from Jurong Shipyard Limited itemizing the various costs in dispute; copy of a letter to the builder of the APL vessels, dated November 22, 1989, relating to Items 3.3-2; 3.3-20; 3.6-9; and 5.3-1; a copy of a drawing and description of work done on a different vessel covering work stated to be similar to Item 3.3-2.
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.
In its application of the vessel repair statute, Customs has held that modifications to the hull and fittings of a vessel are not subject to vessel repair duties. 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, the following elements may be considered.
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 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
Very often when considering whether an addition to the hull and fittings took place for the purpose of 19 U.S.C. § 1466, we have considered the question from the standpoint of whether the work involved the purchase of "equipment" for the vessel. It is not possible to compile a complete list of items that might be aboard a ship that constitute its "equipment". An unavoidable problem in that regard stems from the fact that vessels differ as to their services. What is required equipment on a large passenger vessel might not be required on a fish processing vessel or offshore rig.
"Dutiable equipment" has been defined to include:
...portable articles necessary or appropriate
for the navigation, operation, or maintenance
of a vessel, but not permanently incorporated
in or permanently attached to its hull or
propelling machinery, and not constituting
consumable supplies. Admiral Oriental,
supra., (quoting T.D. 34150, (1914))
By defining what articles are considered to be equipment, the Court attempted to formulate criteria to distinguish non-dutiable items which are part of the hull and fittings of a vessel from dutiable equipment, as defined above. These items might be considered to include:
...those appliances which are permanently
attached to the vessel, and which would
remain on board were the vessel to be laid
up for a long period... Admiral Oriental,
supra., (quoting 27 Op. Atty. Gen. 228).
A more contemporary working definition might be that which is used under certain circumstances by the Coast Guard; it includes a system, accessory, component or appurtenance of a vessel. This would include navigational, radio, safety and, ordinarily, propulsion machinery.
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. The delivery date of the PRESIDENT KENNEDY is July 14, 1990.
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.
In the present case, the petitioner claims that the installation of the above stated items
is a design and operational improvement over the old one. It is claimed that these items were not found to be damaged at the time they were replaced and that the permanent installation of the subject items is to improve the efficiency of the vessel's operation and should be properly considered a non-dutiable modification.
Examination of the entire record, and the documentation submitted with the application, including that portion of the invoice relating to the said items, reveals that these items were installed to enhance the operation of the vessel's efficiency and are permanent installations to the vessel's hull and fittings. Accordingly, the said items are non-dutiable modifications/ additions/alterations to the hull and fittings of the vessel remissible under the statute.
After reviewing the evidence regarding the specific items submitted for our consideration we find that the following items represent modification procedures which are remissible under the statute.:
Item No. (1) 3.3-2 - bow damage stiffening
Item No. (2) 3.3-20 - bottom longitudinales
Item No. (6) 3.6-9 - engine room exhaust fan (Warranty claim of duty-free work extending under the contract for 24 months is beyond the reasonable time standard established by the Court in the Sea-Land warranty case, discussed above.
Item No. (10) 5.3-1 - SSDG Exhaust pipe Extension (Warranty claim of duty-free work extending under the contract for 24 months is beyond the reasonable time standard established by the Court in the Sea-Land warranty case, discussed above.
Item (12) 5.3-7 Main Engine L.O. Cooling Return Isolution
Pursuant to the "but for" test enunciated by the U.S. Court of Appeals in Texaco Marine Services, Inc. and Refining and Marketing, Inc., v. United States, (Slip Op. 93-1354, decided December 29, 1994), protective coverings necessitated by dutiable repairs are dutiable.
Cleaning operations which remove rust and deterioration or worn parts, and which are a necessary factor in the effective restoration of a vessel to its former state of preservation, constitute vessel repairs (See C.I.E. 429/61). Insofar as inspection and cleaning operations are concerned, Customs has long held the cost of 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 C.I.E.'s 18/48, 125/48, 910/59, 820/60, 51/61, 429/61; 569/62, 698/62; C.D. 2514; T.D.'s 45001 and 49531. We find that the operations which were performed on the following items to be dutiable with the following exceptions:
Item No. (3) 3.1-1 - hull cleaning & painting, all items are dutiable except sub-item (g) temporary light.
With regard to Item No. (5) 3.6-2 - No. 4 cargo hold vent, and Item No. (11) 4.1-1 - main switchboard, there is no evidence to indicate that cleaning was performed as part of, in preparation for, or in conjunction with dutiable repairs or that the work was performed as an integral part of the overall maintenance of the vessel. We find that the operations which were performed in Item No. (5) 3.6-2 and Item No. (11) 4.1-1 were for the purposes of inspection and cleaning. Accordingly, all items of cost associated with these two items are non-dutiable.
Item No. (7) 3.6-20 - service tank, all items of cost are dutiable.
With regard to Item No. 999-8 (84) - air filter. The cost for protective coverings associated with this item is dutiable as a part of the repair cost (see Texaco, supra).
Accordingly, in view of the aforementioned court decision protective coverings associated with item 999-8 (84), are dutiable.
With regard to the remaining items, we find as follows:
Item No. (4) 3.1-3 - rudder edge coating, all items are dutiable except the cost for the cherry picker which is equivalent to staging.
Item No. (8) 3.6-21 - wing tank, all items of cost are dutiable except the cost for staging.
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 was indicated at the time of your memorandum that Customs would be receiving eight other entries which can be expected to include this cost category and we were asked to rule upon the dutiable status of such "overhead" charges.
In Ruling 112965 dated December 23, 1993, we stated as follows:
As we stated in Ruling 112900 dated November 4, 1993 and Ruling 112861 dated October 19, 1993, it is Customs position that overhead relating to repair work is dutiable as part of the cost of repairs, i.e., the total cost or expense of the repair is dutiable. In contrast overhead relating to a non-dutiable item such as a modification is non-dutiable, i.e., the total cost of expenses of a non-dutiable item is non-dutiable. 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.
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.
HOLDING:
Following a thorough review of the evidence submitted as well as analysis of the applicable law and precedents, we have determined that the Petition for Review should be allowed in part and denied in part as set forth in the Law and Analysis portion of this ruling.
Sincerely,
Arthur P. Schifflin
Chief
Carrier Rulings Branch