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HQ 111793


December 24, 1991

VES-13-18-CO:R:IT:C 111793 LLB

CATEGORY: CARRIER

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

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