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HQ 111692

December 17, 1991
VES-13-18-CO:R:IT:C 111692 LLB

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Commercial Operations Division
ATTN: Regional Vessel Repair Liquidation Unit New Orleans, Louisiana 70130

RE: Vessel repair; Application for relief; Modifications; Overhead expenses; U.S.-manufactured paint; Vessel repair entry number C20-0035720-5; M/V LIBERTY SPIRIT, V-14C

Dear Sir:

Reference is made to your memorandum of May 7, 1991, which forwards for our review and consideration the Application for Relief from vessel repair duties filed by Liberty Maritime Corporation, in regard to the above-captioned vessel repair entry.

FACTS:

The vessel underwent various repairs and American Bureau of Shipping surveys without repair, both in drydock and afloat. The foreign shipyard also completed the first time installation of a hull cathodic protection system, and applied paint to the hull and stack of the vessel. The only matters in question concern the dutiability of certain specified overhead charges, and of certain paints and thinners.

ISSUE:

Whether certain owner-supplied paints and thinners, as well as foreign shipyard overhead charges are subject to duty under the vessel repair statute.

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.

On August 20, 1990, the President signed into law the Customs and Trade Act of 1990 (Pub. L. 101-382), section 484E of which amends the vessel repair statute by adding a new subsection (h). Subsection (h) has two elements, which are as follows:

(h) The duty imposed by subsection (a) of this section shall not apply to--

(1) the cost of any equipment, or any part of equipment, purchased for, or the repair parts or materials to be used, or the expense of repairs made in a foreign country with respect to, LASH (Lighter Aboard Ship) barges documented under the laws of the United
States and utilized as cargo containers, or

(2) the cost of spare repair parts or materials (other than nets or nettings) which the owner or master of the vessel certifies are intended for use aboard a cargo vessel, documented under the laws of the United
States and engaged in the foreign or coasting trade, for installation or use on such vessel, as needed, in the United States, at sea, or in a foreign country, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff
Schedule of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country.

The effective date of the amendment is stated as follows:

Effective Date.--The amendment made by this section shall apply to--

(1) any entry made before the date of enactment of this Act that is not liquidated on the date of enactment of this Act, and (2) any entry made--
(A) on or after the date of enactment of this Act, and
(B) on or before December 31, 1992.

Subsection (d)(2) of section 1466 provides that:

(d) If the owner or master of such vessel furnishes good and sufficient evidence that...

(2) such equipments or parts thereof or repair parts or materials, were manufactured or produced in the United States, and the labor necessary to install such equipments or to make such repairs was performed by residents of the United States, or by members of the regular crew of such vessel...
then the Secretary of the Treasury is authorized to remit or refund such duties...

Customs has in the past linked this duty remission provision to the duty assessment provision in subsection (a) of the statute. We have held that a two-part test must be met in order for remission of duty to be granted: first, that the article must be of U.S. manufacture; and, second, it must be installed by U.S.-resident or regular vessel crew labor. The reason for this position is that (d)(2) refers to "such equipments or parts...", etc., without any logical association for the word "such" occurring in that subsection. We inferred that "such" articles must refer to those installed under subsection (a), absent any other reasonable predication. The new amendment puts this issue to rest by making it clear that as concerns foreign-made parts imported for consumption and then installed on U.S. vessels abroad, the labor required for their installation is separately dutiable. A part may now be considered exempt from vessel repair duty albeit the foreign labor cost is dutiable.

In all cases which meet the conditions imposed by the statutory amendment, uniform treatment will be accorded to parts sent from the United States for use in vessel repairs abroad. This will be so regardless of whether they are proven to have been produced in the U.S., or to have been imported and entered for consumption with duty paid. In both cases, the cost of the materials is duty exempt and only the cost of foreign labor necessary to install them is subject to duty. Crew member or U.S.-resident labor continues to be free of duty when warranted, in cases which qualify under the new law.

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, management fees, and coverall charges paid as part of the contract for foreign shipyard services. The term would not include any separate taxi and limo services.

As concerns the paint and thinners in question, there can be no dispute that they are of United States manufacture and were shipped from this country for use abroad. Evidence in the file includes certificates of origin, shipper's export declarations, bills of lading, and manufacturer's statements. This being the case, the cost of the materials is not subject to duty by virtue of section 1466(h), although the labor portion remains dutiable.

HOLDING:

Following a thorough review of the evidence and analysis of the law and applicable precedents, we have determined that the Application for Relief should be allowed in part and denied in part, as specified in the Law and Analysis portion of the ruling.

Sincerely,

B. James Fritz

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