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HQ 111545


July 31, 1991

VES-13-18 CO:R:IT:C 111545 JBW

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Commercial Operations c/o Regional Commissioner
New Orleans, LA 70130-2341

RE: Vessel Repairs; Inspection; Discount; S/S LOUISIANA; Entry No. C20-0012281-5.

Dear Sir:

This letter is in response to your memorandum of February 14, 1991, which forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry.

FACTS:

The record reflects that the subject vessel, the S/S LOUISIANA, arrived at the port of Lake Charles, Louisiana, on August 8, 1990. Vessel repair entry, number C20-0012281-5, was filed on the same day as arrival. The entry indicates that the vessel underwent repairs at the Compagnie Marseillaise de Rparations (CMR) in Marseille, France, from June 27, 1990, to July 22, 1990. The work included repairs, that are acknowledged to be subject to duty in the application, and work claimed to be free from duty as modifications, inspections, and drydocking costs.

ISSUES:

(1) Whether certain costs incurred as a result of an inspection of the vessel's starboard boiler top coil air heater are dutiable if such costs are attributable both to repairs and to a reactivation survey carried out by the American Bureau of Shipping.

(2) Whether a credit applied against the cost of paint used in a repair results in a diminution of the dutiable value of the item.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466, provides in pertinent part for payment of duty in the amount of fifty percent ad valorem on the cost of foreign repairs to vessels documented under the laws of the United States to engage in foreign or coastwise trade, or vessels intended to engage in such trade.

The applicant seeks relief from duty for the costs of an inspection of the vessel's starboard boiler top coil air heater. CMR Invoice Item 104. The record shows that nine leaks were found and repaired. Id.; ABS Reactivation Survey, dated 20 July 1990. Customs has held that inspections not resulting in repairs are not dutiable. Headquarters Ruling Letter 110395, dated September 7, 1989; see American Viking Corp. v. United States, 37 Cust. Ct. 237, 247, C.D. 1830 (1956). 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. Headquarters Ruling Letter 110368, dated July 26, 1989. However, if the survey is to ascertain the extent of damage sustained or whether repairs are necessary, then the costs are dutiable as part of the repairs that are accomplished. 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). In the liquidation process, Customs should look beyond the mere labels of "continuous" or "ongoing" before deciding whether the item is dutiable. If an inspection or a survey is conducted as a part of a maintenance and repair program labelled "continuous" or "ongoing," the cost of such survey is dutiable if it is in fact repair related.

We find the claim of the applicant that the inspection costs of the starboard boiler top coil air heater is non-dutiable as an inspection to be problematic. The simple fact that some classification society is involved in a drydocking survey does not render all inspection costs non-dutiable. The mere labeling of work "inspection" is ambiguous, for the documentation provided does not demonstrate whether the cost for the inspection was, for example, to ascertain the extent of the known deterioration of the part, which is dutiable, or whether the cost of the inspection was exclusively related to examination by the classification society. All repairs involve some form of inspection. In this case, the disparity between the cost for inspection and the cost for repairs suggests that some of the so- called "inspection" costs were related to these repairs. While the cost of the ABS survey is not dutiable, if properly segregated, the inspection to determine the required repairs is dutiable. Absent such a breakdown, we find the entire cost for inspection to be dutiable.

The applicant also identifies as the dutiable value for paint used in repairs the cost of the paint minus a three percent discount, which was calculated based on the date of payment, minus a forty-three percent credit. Hempel Invoice 500070, dated July 24, 1990. The Customs Service recognizes that only actual expenses borne by the vessel should be taken into consideration when liquidating vessel repair entries; we have thus permitted the deduction of "discounts," which are properly documented, from the invoiced cost of parts or materials. Headquarters Ruling Letter 111230, dated November 8, 1990; C.I.E. 227/63, dated December 20, 1962.

Duty, therefore, should not be assessed against the value of the three percent discount contained in the Hempel Invoice. However, the reason or purpose for the forty-three percent "credit" is unclear. If the credit is in the nature of a discount--that is, a simple reduction in the cost to the purchaser--then clearly duty should not be assessed. If the credit represents the payment of part of the cost by other means, then duty should be assessed against the amount of the credit. Absent an explanation of what the credit represents, we find the amount of the credit to be dutiable.

HOLDINGS:

(1) The cost of an inspection is dutiable if the inspection is performed to ascertain whether repairs are required. In cases where inspection costs are attributable both to repairs and to a survey carried out by the American Bureau of Shipping, the cost of the inspection to determine whether repairs are required is dutiable, whereas the cost of the ABS survey is not subject to duty. Absent a breakdown that apportions the inspection costs, we find the entire cost for the inspection to be dutiable.

(2) The credit appearing in the Hempel invoice is not identifiable as a non-dutiable discount. We find the amount of the credit to be dutiable.

Sincerely,

B. James Fritz
Chief

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