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HQ 112383

October 27, 1993

VES-13-18-CO:R:IT:C 112383 GFM

CATEGORY: CARRIER

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

RE: Vessel Repair; Cleaning; Consumable Oil; Repair Access; Staging; M/V SEA WOLF; Entry No. C18-0017232-7

Dear Sir:

This is in response to your memorandum of July 10, 1992, which forwards for our review an application for relief filed in connection with the above captioned vessel-repair entry. Our findings are set forth below.

FACTS:

The M/V SEA WOLF undertook repairs at the Renave Shipyard in Niteroi, Rio De Janiero, from March 18 through March 28, 1992. The vessel arrived at Jacksonville, Florida, on April 18, 1992, and an application for relief was timely filed on June 16, 1992. Said application seeks relief from duty for various inspection, cleaning, repair, and modification charges incurred during vessel's dockage at the Renave Shipyard.

ISSUE:

Whether the cost of foreign shipyard work completed aboard the subject vessel is dutiable pursuant to 19 U.S.C. 1466.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466(a) provides, in pertinent part, for payment of duty in the amount of 50 per cent ad valorem on the cost of foreign repairs to vessels engaged, intended to engage, or documented under the laws of the United States to engage in the foreign or coastwise trade. Item C-10 SEA VALVE INSPECTION.......................$ 2,236.00

This item involves the inspection of sea valves pursuant to American Bureau of Shipping and United States Coast Guard requirements. Applicant asserts that the charges included in this item should be classified as non-dutiable incidents to a required inspection.

Customs Service Decision 79-277 stated, "[i]f the survey was undertaken to meet the specific requirements of a governmental entity, classification society, insurance carrier, etc., the cost is not dutiable even if dutiable repairs were effected as a result of the survey."

With increasing frequency, this ruling and subsequent rulings citing it, have 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. 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, 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 are necessary. Although the invoice indicates 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 (ABS). 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 from duty the cost of maintenance or repair work done by a shipyard in preparation of a required survey. Nor does it exempt from duty the cost of any testing by the shipyard to check the effectiveness of repairs completed previous to, or found to be necessary by reason of, the required survey.

The item in question clearly constitutes a dutiable transaction. The so-called "internal inspection" under consideration includes charges for "clean[ing] all valve internals," "grind[ing] [and testing] all seats and lids," "painting internals," "renew[ing] all joint material," "sandblast[ing] *** and apply[ing] epoxy," and "remov[ing] and replac[ing] valve with new spare." In accordance with C.S.D. 79- 277, these items are not related to inspections, but are dutiable incidents to repair. Accordingly, with the exception of the charge for "opening and closing valves ($ 612.00)," the remaining cost of the item ($ 1,624.00) is dutiable.

Item C-11 SEA CHEST INSPECTION.......................$ 1,322.00

This item involves the inspection of sea chests pursuant to American Bureau of Shipping and United States Coast Guard requirements. Applicant asserts that the charges included in this item, too, should be classified as non-dutiable incidents to a required inspection.

With regard to this item, the invoice included charges for "remov[ing] and clean[ing] strainer plates for internal inspection," "mounting and dismounting of staging," "clean[ing] and sandsweep[ing] of interior of sea chests and connecting pipe," "coat[ing] interior with primer and anti-fouling agent," and "clos[ing] up strainer plates as original and install[ing] keepers on studs and nuts."

With regard to the "remov[ing] and clean[ing] [of the] strainer plates," as the cleaning charges are not segregated from the access charges, the activity is dutiable.

Similarly, with regard to "clos[ing] up strainer plates as original and install[ing] keepers on studs and nuts," as the installation of new equipment is not segregated from the closure, this activity too, must be held dutiable.

With regard to the remaining activities, in accordance with C.S.D. 79-277, they are not related to inspections, but are dutiable incidents to repair. Accordingly, the entire cost of the item ($ 1,322.00) is dutiable.

Item C-12 SHAFT/PROPELLER INSPECTION.................$ 653.00

This item represents charges incurred pursuant to a shaft/propeller inspection conducted by the American Bureau of Shipping. In addition to non-dutiable inspection-related charges for "mounting and dismounting staging ($ 44.00)," "remov[ing] and replac[ing] rope guard ($ 241.00)," "and tak[ing] shaft clearances ($ 82.00)," the invoice contains charges for "drain[ing] outer simplex oil and refill[ing] the system with new oil ($ 50.00)" and "apply[ing] fish oil supplied by yard ($ 236.00)." The first three enumerated charges relate exclusively to inspection operations and are clearly non- dutiable. However, the operations involving the drainage and application of oil do indeed constitute dutiable maintenance operations. Accordingly, the charges related to the drainage and application of oil ($ 50.00 and $ 236.00, respectively), are dutiable.

Item C-13 ANCHOR/CHAIN INSPECTION....................$ 2,873.00

This item represents charges for lowering and ranging the vessel's anchors and chains pursuant to an ABS inspection. The invoice states that in addition to inspection-related charges for "lower[ing] and rang[ing] both anchors ($ 252.00)," and "measur[ing] links and supply[ing] report for ABS ($ 144.00)," work was done to "wash *** and sandblast SA-1 ($ 659.00)," "mark shots with sizing wire and paints ($ 216.00)," "wash, sandsweep and apply *** paint ($ 1,060.00)," "clean [and] scrape rusty incrustations ($ 472.00)," and "drain dirty water and remove sludge ($ 70.00)."

Clearly, the first two charges enumerated herein relate exclusively to the inspection operations and are non-dutiable. However, the remaining items are equally clear examples of dutiable repair operations. Accordingly, with the exception of the inspection-related charges, the remaining cost of the item ($ 2,477.00) is dutiable.
Item EX-8 STRUCTURAL REPAIRS.........................$ 11,036.00

This item represents charges incurred for structural repairs made to several port and starboard tanks. The invoice lists six (6) such tank repairs at a combined cost of $ 7,764.00. These operations are clear examples of non-excepted foreign repairs and are thus, dutiable. Those segments of the invoice item which relate to "mounting and dismounting of scaffolding ($800.00)," "temporary lighting and ventilation" ($600.00)," and "transportation ($144.00)," however, are incidents to repair which have long been held non-dutiable. Accordingly, with the exception of the charges for these three inspection-related items, the remaining cost of the item ($ 9,492.00) is dutiable.

HOLDING:

After thorough review of the evidence presented, and as detailed in the Law and Analysis portion of this ruling, the application for relief is granted in part and denied in part.

Sincerely,

B. James Fritz

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