HQ 0112053 - Vessel Repair; 19 U.S.C. 1466; Application for Relief; Vessel Repair Entry No. C16-0008526-5; M/V SEALAND PERFORMANCE V-35 - United States International Trade Commision Rulings

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HQ 112053

March 16, 1992

VES-13-18 CO:R:IT:C 112053 MLR

CATEGORY: CARRIER

Deputy Assistant Regional Commissioner
Commercial Operations Division
423 Canal Street
New Orleans, Louisiana 70130-2341

RE: Vessel Repair; 19 U.S.C. 1466; Application for Relief; Vessel Repair Entry No. C16-0008526-5; M/V SEALAND PERFORMANCE V-35

Dear Sir:

This letter is in response to your memorandum of December 9, 1991, which forwards for our consideration the above-referenced Application for Relief from the assessment of vessel repair duties submitted by Sea-Land Service, Inc.

FACTS:

The record reflects that the subject vessel, the M/V SEALAND PERFORMANCE, arrived at the port of Charleston, South Carolina, on August 14, 1991. Vessel repair entry, number C16- 0008526-5, was filed on the same day as arrival indicating work performed on the vessel in Rotterdam, the Netherlands; Bremerhaven, Germany, and Felixstowe, England.

The vessel owner timely filed an application for relief on October 15, 1991. Numerous invoice items are claimed nondutiable. We are asked to review the dutiability of the following items:

I. Lloyd-Werft Invoice 0-200:

Item 028: Sea-chest inspection operations which may involve some repair elements.

Item 033: Coating applied to the fathometer well.

Items 192, 198, 203 and 204: The segregated cost of venting operations and lighting.

II. Deep Sea Seals Invoice 21766: ABS inspection of liners. We also address the dutiability of ABS overtime charges listed on ABS invoice PN 6708 no. 3668(B).

III. Lloyd-Werft Invoice 0-211: Item 039, drawing tailshaft for examination

IV. Fuji Trading Invoice: Origin of aft stern tube bearing and security bolts

ISSUE:

Whether the foreign work performed on the subject vessel for which the applicant seeks relief is dutiable under 19 U.S.C. 1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466, 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 foreign or coastwise trade, or vessels intended to engage in such trade.

I. Lloyd-Werft Invoice 0-200

Certain vessel inspection operations are generally considered nondutiable. 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. C.S.D. 79-277. With increasing frequency, this ruling has been utilized by vessel owners seeking relief not only from charges appearing on an ABS or Coast Guard invoice (the actual cost of the inspection), but also as a rationale for granting non-dutiability to a host of inspection-related charges appearing on a shipyard invoice.

Pursuant to published Customs Service rulings (C.I.E. 1325/58 and C.I.E. 565/55), duties may not be remitted in circumstances in which invoices fail to segregate dutiable from nondutiable expenditures. Such is the case in regard to invoice item 028 which involves opening sea-chests for cleaning and inspection by the Coast Guard and American Bureau of Shipping. Included in the item is the unsegregated cost of coating and renewing defective fasteners, a repair expense. The presence of this unsegregated expense renders the entire item subject to duty as a repair expense.

The same rationale may be applied to item 033, the inspection of the fathometer well. Customs has held that painting performed on existing portions of a vessel is in the nature of a dutiable maintenance operation. C.I.E. 1043/60, and Treasury Decisions 21670, 39507, and 43322. Customs has also held that coating with substances which have protective and preservative qualities is analogous to painting and therefore is dutiable (see C.I.E.'s 1203/60, 518/63 and 2045/66). The process of chipping, scaling, cleaning, and wire brushing to remove rust and corrosion that results in the restoration of a deteriorated item in preparation for painting has also been held to be dutiable maintenance. States Steamship Co. v. United States, 60 Treas. Dec. 30, T.D. 45001 (Cust. Ct. 1931). These precedents are relevant to the operation performed in invoice item 033 which details the scaling and coating of the fathometer well. The item must be considered dutiable.

Items 192, 198, 203, and 204 designate segregated costs for venting operations and lighting. In the case of United States v. George Hall Coal Co., 134 F. 1003 (1905), it was held that any of various types of expenses associated with foreign shipyard operations are classifiably free from the assessment of duty, regardless of the character of the overall shipyard work (repair vs. modification). The case found that the expense of drydocking a vessel is not a repair cost. Drydocking is not an isolated expense, and is commonly associated with numerous others. These may include, but are not limited to, sea water supply (for firefighting capability), fresh water supply, hose hook-up and disconnection, fire watch services, shore power hook-up, etc.

Similarly, pursuant to CD 1836 charges for drydocking, for furnishing electricity, air and water, fees paid for the use of tugs and pilots in drydocking and undocking a vessel, and crane expenses are not dutiable repairs if segregated on the invoice. We would place the segregated costs of ventilation and lighting in this category and would thus allow as duty-free such expenses appearing in items 192, 198, 203 and 204. However, the cost of obtaining a gas free certificate constitutes an ordinary and necessary expense incident to repair operations and is accordingly dutiable. C.I.E. 1188/60. The charge, though, should be apportioned between the costs which are to be remitted and those for which relief is not warranted, and duty assessed on that portion of the charge applicable to items which are not being remitted.

II. Deep Sea Seals Invoice 21766

If a survey is conducted to ascertain the extent of damage sustained, whether repairs are necessary, or if the work was adequately completed, 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). Therefore, the ABS charge for inspecting the dutiable repairs to the liners is dutiable. Further, we find that the cost of ABS surveys {ABS PN 6708 Invoice 3668(B)} conducted "outside normal working hours" is dutiable because the evidence does not clearly show that the overtime expenses were not incurred for the survey of damages or repairs. See Customs Ruling 109995.

III. Lloyd-Werft Invoice 0-211

The applicant, citing C.I.E. 429/61, claims that item 039 "drawing the tailshaft for examination" is part of a nondutiable inspection. Rather, we find that C.I.E. 429/61 provides an argument that item 039 is dutiable, particularly the reference made that testing is dutiable, which is effected for the purpose of ascertaining whether repairs to certain machinery or parts of the vessel are required. As discussed above, increasingly vessel owners have been seeking relief for a host of inspection-related charges appearing on a shipyard invoice. In light of this continuing trend, we offer the following clarification.

C.S.D. 79-277 discussed the dutiability of certain charges incurred while the vessel underwent biennial U.S. Coast Guard and ABS surveys. That case involved the following charges:

ITEM 29
(a) Crane open for inspection.
(b) Crane removed and taken to shop. Crane hob and hydraulic unit dismantled and cleaned.
(c) Hydraulic unit checked for defects, OK. Sundry jointings of a vessel's spare renewed.
(d) Parts for job repaired or renewed.
(e) Parts reassembled, taken back aboard ship and installed and tested.

In conjunction with the items listed above, we held that a survey undertaken to meet the specific requirements of a governmental entity, classification society, or insurance carrier is not dutiable even when dutiable repairs are effected as a result of the survey. We also held that where an inspection or survey is conducted merely to ascertain the extent of damages sustained or whether repairs are deemed necessary, the costs are dutiable as part of the repairs which are accomplished (emphasis added).

It is important to note that only the cost of opening the crane was exempted from duty by reason of the specific requirements of the U.S. Coast Guard and the ABS. The dismantling and cleaning of the crane hob and hydraulic unit was held dutiable as a necessary prelude to repairs. Moreover, the testing of the hydraulic unit for defects was also found dutiable as a survey conducted to ascertain whether repairs were necessary. Although the invoice indicated that the hydraulic unit was "OK," certain related parts and jointings were either repaired or renewed. Therefore, the cost of the testing was dutiable.

We emphasize that the holding exempts from duty only the cost of a required scheduled inspection by a qualifying entity (such as the U.S. Coast Guard or the American Bureau of Shipping). In the liquidation process, Customs should go beyond the mere labels of "continuous" or "ongoing" before deciding whether a part of an ongoing maintenance and repair program labelled "continuous" or "ongoing" is dutiable.

Moreover, we note that C.S.D. 79-277 does not exempt repair work done by a shipyard in preparation of a required survey from duty. Nor does it exempt from duty the cost of any testing by the shipyard to check the effectiveness of repairs found to be necessary by reason of the required survey.

Turning to the case before us, the Martin & Ottaway surveyor (invoice no. PN 6718), who evaluated the effectiveness of the repairs performed on the stern tube bearings, states that the repairs involved: the "necessary removals for access to and in connection with repair including re-fitting afterwards..." of the "propeller fairwater cap and rope guard, propeller nut and keeper, outboard and inboard seal assemblies, shaft coupling bolts, tail shaft, protection covers, hand rail, platform sections, and pipeline section." Further, the surveyor states that the repairs "...consisted of removal of the propeller and drawing of the tail shaft." The tailshaft was only found to have "touched the aft part of the after bearing."

The Diehl Engineering Tailshaft Alignment survey (invoice no. PN 6719) concludes that the aft stern bearing was operating with an excessive angle between it and the tailshaft. Further, the ABS report {invoice 3668(B)} indicates that an inspection titled, "tailshaft (repairs)," was conducted. Accordingly, we conclude that the work performed to the tailshaft under item 039 listed on Lloyd-Werft Invoice 0-211 is dutiable, because this item goes beyond mere operations undertaken to meet the specific requirements of an ABS periodic survey. It is also Customs position, that accessing a part (i.e. the tailshaft) is dutiable, if it is integral to dutiable repairs. See Customs Ruling 108366.

IV. Fuji Trading Invoice

The applicant claims that various spare parts were either purchased in the United States or were purchased abroad and imported into the United States with duty paid. The vessel repair statute exempts from duty spare repair parts or materials that have been manufactured in the United States or have been previously imported into the United States as commodities with applicable duty paid under the Harmonized Tariff Schedule of the United States. 19 U.S.C. 1466(h). For purposes of this section, where a part is purchased from a party unrelated to the vessel owner, a United States bill of sale constitutes sufficient evidence to demonstrate that the part was either manufactured in the United States or entered in the United States, duty-paid. In cases in which the vessel operator or a related party has acted as the importer of foreign materials, or where materials were imported at the request of the vessel operator for later use by the operator, the vessel repair entry will identify the port of entry and the consumption entry number for each part installed on the ship which has not previously been entered on a Customs Form 226. It is our policy to require evidence beyond an affidavit from an interested party to establish U.S. manufacture and U.S. purchase.

We have reviewed the invoices included in the application for relief, and have determined that the evidence presented for the aft stern tube bearing and security bolts (Fuji Trading invoice no. 185-457-63-8032) does not satisfy the evidentiary requirements for duty exemption. The parts under consideration are not of U.S. origin (the purchase order indicates delivery free on board, Kobe, Japan; and the invoice indicates dispatch from Rotterdam, the Netherlands), nor is there any record of a Customs Form 226 indicating that duty was paid (as the applicant has presented for some of the other parts for which duty exemption is claimed). For these reasons, the aft stern tube bearing and security bolts are dutiable.

HOLDING:

We find that items 028, and 033 of Lloyd-Werft Invoice 0-200 are dutiable, and items 192, 198, 203, and 204 are nondutable with the gas free certificate to be apportioned. The ABS survey cost of inspecting the liners (Deep Sea Seals Invoice 21766) and the ABS overtime expenses {ABS PN 6708 no. 3668(B)} are dutiable. Item 039 of Lloyd-Werft Invoice 0-211 is dutiable as a cost of accessing dutiable repairs, and because the work performed was integral to repairs. Further, we find that the Fuji Trading invoice does not present sufficient evidence to prove that duty was paid on the aft stern tube bearings.

Sincerely,

B. James Fritz

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