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HQ 112418


June 29, 1993

VES-13-18 CO:R:IT:C 112418 GFM

CATEGORY: CARRIER

Chief, Technical Branch
Commercial Operations
Pacific Region
1 World Trade Center
Long Beach, CA 90831

RE: Vessel Repair; Modification; Repair; Petition; Segregation of Costs; Inspection; Warranty; Settlement; Air Scavenger Spaces; Overhead; Supplemental Petition; 19 U.S.C. 1466; 19 C.F.R. 4.14(d)(2)(i);
M/V PRESIDENT POLK; Entry No. C27-0054168-6.

Dear Sir:

This letter is in response to your memorandum dated May 20, 1993, which forwards for our review the "Supplemental Petition for Review" submitted by the petitioner in conjunction with the above-referenced vessel repair entry. We note at the outset that concerning the filing of a Supplemental Petition for Review, it was the position of Customs, as articulated in Customs Ruling Letters 110027 of September 29, 1989, and 109671 of September 18, 1988, that a bifurcated procedure existed for final administrative appeals of vessel repair decisions, depending upon whether a particular appeal involved classification issues (expenses incurred were not for repairs or equipment purchases under section 1466(a)), or whether remission issues were the subject of appeal (those matters arising under section 1466(d)). It was our position that classification issues were subject to Protest, and that the proper filing for the appeal of remission issues was a Supplemental Petition for Review. The Court in Penrod Drilling Company v. United States, 727 F. Supp. 1463 (1989), ended distinctions between the issues of classification and remission so far as the question of appeal format is concerned by holding that all matters arising under section 1466 may be protested. In the present matter therefore, as liquidation of the entry had not taken place prior to the submission of additional evidence by petitioner's counsel, such additional evidence is to be considered part of the original petition and not a "Supplemental Petition for Review." We note further that had liquidation occurred prior to such a submission, such evidence would not be considered part of a "Supplemental Petition for Review," but rather, part of a Protest.

FACTS:

The vessel PRESIDENT POLK arrived at the port of San Pedro, California, on May 25, 1991, and filed a timely vessel repair entry. The entry indicates the vessel underwent foreign shipyard work while in Japan, Taiwan, and Hong Kong. The entry also indicates that during the course of its foreign voyage, the vessel anchored at Singapore where it underwent extensive repair and modification procedures. In Headquarters Ruling Letter 111884, we considered the dutiability of numerous vessel repair items. We are now requested to reconsider the dutiability of some of those items.

ISSUE:

Whether certain foreign shipyard operations performed aboard the subject vessel are subject to duty under 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 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.

ITEM 3.1-1 LIGHTING...............................$ 1,370.00

This item involves segregated charges for lighting which were held dutiable at the application stage. As this item represents segregated charges for lighting only, the item should be considered non-dutiable.

ITEM 3.2-6 CARGO HOLD CLEANING....................$ 34,400.00

This item involves cleaning of the cargo holds which petitioner asserts was not related to any repairs. With regard to cleaning operations, whether the cleaning was performed before, during or after the dutiable repair work is irrelevant as to the question of dutiability. Customs has long held that cleaning performed in preparation of, or in conjunction with dutiable repairs is dutiable. Customs Memorandum 109789 GV (11- 4-88). Contrary to petitioner's contention, our review of the invoice regarding this item shows that major repairs were in fact carried out to the vessel's #1,#2, and #7 cargo holds. Thus, as a nexus between the repairs and the cleaning does exist, the cost of this item ($ 34,400) is dutiable.

ITEM 3.2-5 HATCH COAMINGS.........................$ 12,630.00

ITEM 3.3-10 HATCH COVERS
Sub-item (a)...................................$ 39,600.00 Sub-item (b)...................................$ 28,900.00 Sub-item (c)...................................$ 33,880.00 Sub-item (d)...................................$ 4,290.00 Sub-item (e)...................................$ 29,580.00 Sub-item (f)...................................$ 25,160.00 Sub-item (g)...................................$ 3,140.00 Sub-item (h)...................................$ 55,980.00 Sub-item (i)...................................$ 15,360.00 Sub-item (j)...................................$ 14,460.00 Sub-item (k)...................................$ 2,112.00

These items involve charges for operations performed to several of the vessel's hatch covers and coamings. Petitioner contends that the malfunction of these items was due to a design defect which is present in four other similarly constructed vessels delivered under the same contract.

The PRESIDENT POLK was delivered on July 17, 1988 under warranty from the builder HDW. Submitted with the petition is a copy of a letter dated February 10, 1989, in which the petitioner (APL) notifies the shipbuilder (HDW) of said defects and details specific instances of breakdown. As the petitioner thus notified the vessel builder of these alleged defects within the established one-year period, petitioner contends that these items should be considered non-dutiable repairs made under warranty.

Regarding items 3.3-10 and 3.2-5, the above referenced APL letter of February 10, 1989, indicates that inspections were performed which revealed certain failures and that more inspections were scheduled to take place. In the absence of evidence to the contrary, we place faith in petitioner's claim that additional inspections prior to the April/May 1991 repairs were indeed carried out and that as the record contains no evidence to suggest otherwise, the work performed in items 3-3.10 and 3.2-5 resulted from failures revealed in those inspections.

With regard to warranties, the case of Sea-Land Service, Inc. v. United States, 683 F. Supp. 1404 (CIT 1988), 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. In that case, 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 bench mark for honoring new construction warranties which otherwise qualify.

However, mere discovery and timely notice of a warranty claim will not in and of itself, entitle an item to duty remission. For duty remission to lie, Customs must be satisfied that the warranty claim has been accepted by the vessel builder or insurer. In the present case, according to APL letter # 5230- RFS/BV, dated November 22, 1989, HDW's subcontractor, BV, disclaimed liability for the items considered here arguing that such damages were caused by heavy weather. In paragraph 7, page 4, of the petition, the petitioner states that APL and HDW "recently reached a finalized agreement on these claims wherein HDW has agreed to pay APL for hatch cover costs under warranty." Further, the petition states that: "APL has also filed claims with BV under warranty for these hatch cover/coaming repairs on the basis of the HDW settlements. They anticipate a similar resolution with BV."

The petition now before us contains no evidence regarding either the recently finalized agreement between HDW and APL or the claims submitted to BV. Consequently, unless and until evidence is presented to show that the vessel builder or insurer will extend coverage under warranty to the operations in question, we have no recourse but to consider them dutiable as repairs.

Sub-item (a):

We note that sub-item (a) involves the lifting ashore and onboard of hatch covers which included arranging the necessary lifters and cranes to load and unload the hatch covers which petitioner claims are non-dutiable transportation costs. According to C.I.E. 1325/58, charges for transportation of parts and materials between a vessel and a workshop are not dutiable if itemized separately. Moreover, it is the position of the Customs Service that "transportation" does not include operations relative to preparing the item for shipping. Thus, labor for such services as removing a part from its housing or mounting, or disconnecting an item, etc., does not constitute transportation and is thus, dutiable. Headquarters Ruling Letter 112211. With respect to item 3.3-10(a), the invoice contains consolidated transportation charges and includes charges for services which may not be included in transportation costs. Accordingly, the entire cost of this sub-item ($ 39,600.00) is dutiable.

Each of these items is considered a dutiable incident of repair of the hatch covers and coamings for reasons set forth above. Thus, the entire combined cost of these sub-items ($ 167,922.00) is fully dutiable.

Sub-item (e):

Pursuant to the Jurong Shipyard Limited letter of June 17, 1992, which contains a cost segregation for item 3.3-10, sub- item (e) contains a segregated cost of $ 28,242.00 for staging. As such costs have previously been considered non-dutiable, only the remaining portion of that charge ($ 1338.00) is dutiable.

Sub-item (i):

Pursuant to the Jurong Shipyard Limited letter of June 17, 1992, which contains a cost segregation for item 3.3-10, sub- item (i) contains a segregated cost of $ 2,112.00 for staging. As such costs have previously been considered non-dutiable, only the remaining portion of that charge ($ 13,248.00) is dutiable.

ITEM 3.3-14 HATCH #1 & #2..........................$ 1,700.00

This item involves the welding of fractures on the #1 and #2 longitudinal hatch coamings. Contrary to petitioner's contention, this was not "primarily a modification." According to evidence submitted, these operations remedied an existing fracture. They are thus considered repairs. Moreover, as inclusion of this item under warranty has yet to be established, it is not part of the warranty repairs. Accordingly, the cost of this item ($ 1,700.00) is fully dutiable. ITEM 3.3-20 BOTTOM LONG. FRAMES 3, 6, and 9........$ 10,775.00

This item involves the fabrication, fitting and welding of brackets on the longitudinal frames in the APT void spaces "as per issued repair." According to the evidence submitted, these operations remedied an existing fracture. They are thus considered repairs. Moreover, as inclusion of this item under warranty has yet to be established, it is not part of the warranty repairs. Accordingly, the cost of this item ($ 10,775.00) is fully dutiable.

ITEM 998-4 PORT/STBD TRANSFORMER...................$ 4,726.00

This item involves cleaning of the transformer panels and surrounding area. As this item does not seem to be associated with any repair element, its cost ($ 4,726.00) is non-dutiable.

ITEM 5.4-10 SUPPLY FAN TRANSPORTATION..............$ 1,056.00 ITEM 5.4-13 EXHAUST FAN TRANSPORTATION.............$ 950.00

These items represent charges for transporting said fans from the vessel to the workshop. As the items represent segregated charges for transportation only, the cost of these items is non-dutiable.

OVERHEAD............................................$ 150,560.00

Petitioner has submitted a cost breakdown for general services performed at the shipyard which are said to represent non-productive overhead charges. The burden of demonstrating the underlying justification for such charges and their relationship to specific repair operations has not been met. The charges shown are attributable to the operation of the shipbuilding facility in general. Consequently, the cost of the item ($ 150,560.00) is fully dutiable.

ITEM 6 (CF 226) SCAVENGER AIR SPACES................$ 22,760.00

The scavenging spaces of a diesel engine are steel chambers that are permanently attached to the cylinders of the engine. The scavenging spaces serve two functions. First, the scavenging spaces receive the discharge from the turbo-chargers and deliver the charged air to each cylinder via reed valves and intake ports. Second, air from the piston underside is pumped into the scavenging space via reed valves to supplement turbo-charger- delivered air. This air enters the cylinders via inlet ports uncovered when the piston gets to the bottom end of its stroke and serves to "scavenge" the burnt gasses out of the cylinder. This process cleans the cylinders of spent energy and provides a clean air discharge for the next fuel injection. As a result of this process, some gasses containing unburnt carbon may be left and deposited in the scavenging spaces.
These carbon deposits and other oily deposits in the scavenger spaces may result in fire or explosion. They also reduce the efficient operation of the engine. Diesel engine maintenance manuals therefore require periodic cleaning of the scavenger spaces to permit the safe and efficient operation of the vessel. The maintenance of a scavenger space involves removing access plates and scraping, wire brushing, and wiping the inside of the space. This operation is labor intensive and would take a single worker up to two working days to clean a single cylinder.

In analyzing the dutiability of foreign vessel work, the Customs Service has consistently held that cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs or is an integral part of the overall maintenance of the vessel. E.g., Headquarters Ruling Letter 110841, dated May 29, 1990 (and cases cited therein). The Customs Service considers work performed to restore a part to good condition following deterioration or decay to be maintenance operations within the meaning of the term repair as used in the vessel repair statute. See generally, Headquarters Ruling Letter 106543, dated February 27, 1984; C.I.E. 142/61, dated February 10, 1961.

The dutiability of maintenance operations has undergone considerable judicial scrutiny. The United States Court of Customs and Patent Appeals, in ruling that the term repair as used in the vessel repair statute includes "maintenance painting," gave seminal recognition to the dutiability of maintenance operations. E. E. Kelly & Co. v. United States, 55 Treas. Dec. 596, T.D. 43322 (C.C.P.A. 1929). 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).

Most recently, the United States Customs Court examined whether the scraping and cleaning of Rose Boxes constituted dutiable repairs. Northern Steamship Company v. United States, 54 Cust. Ct. 92, C.D. 1735 (1965). Rose Boxes are parts fitted at the ends of the bilge suction to prevent the suction pipes from being obstructed by debris. The court determined that the removal of dirt and foreign matter from the boxes did not result in the restoration of the boxes to good condition following deterioration and consequently held that the work was not subject to vessel repair duties. Id. at 99.

The petitioner cites this line of judicial and administrative decisions and contends that these decisions establish a position of the Customs Service with regard to the dutiability of cleaning air scavenger spaces. We do not dispute that this line of decisions generally establishes the position of the Customs Service on the non-dutiability of cleaning operations unrelated to repairs or the dutiability of maintenance operations. However, the precise issue presented is whether the cleaning of air scavenger spaces may be characterized as simple cleaning or as maintenance, not whether cleaning or maintenance operations are dutiable or non-dutiable.

The petitioner's conclusion that the cleaning of air scavenger spaces is a "simple" cleaning and is a fortiori not subject to duty based on the decisions cited is untenable. The petitioner attempts to characterize the cleaning of air scavenger spaces as "simple" cleaning needed only for inspection of the engine valves. This characterization fails, however, to include the threat of fire or explosion posed by the failure to properly maintain the scavenger spaces. It further fails to note the decline in efficiency of the engines that results from the collection of the carbon and oil deposits in the air scavenger spaces. As stated in our previous rulings, the collection of carbon and oil deposits results in a deterioration--as manifested in the safety and efficiency problems--of the air scavenger spaces that may only be corrected by cleaning the air scavenger spaces. See generally Headquarters Ruling Letter 111700, dated November 19, 1991. We therefore reaffirm our position that cleaning air scavenger spaces is a maintenance operation that is subject to duty under 19 U.S.C. 1466.

The petitioner contends that the Customs Service did not publish its "surprise change of position" as required by the Administrative Procedure Act and the Customs Regulations. The Customs Regulations require the publication in the Federal Register with an opportunity for public comment of a ruling that has the effect of changing a practice that results in a higher rate of duty. 19 C.F.R. 177.10(c)(1) (1992). The Customs Service first addressed the issue of cleaning air scavenger spaces in Headquarters Ruling Letter 110911, dated December 3, 1990. The petitioner has failed to cite a ruling or to demonstrate otherwise that the Customs Service had in fact established a position on the dutiability under 19 U.S.C. 1466 of the cleaning of air scavenger spaces prior to Headquarters Ruling Letter 110911. Moreover, as shown in the previous paragraph, we do not believe that the petitioner has demonstrated that the holding in Headquarters Ruling Letter 110911 deviates from existing judicial decisions or results in a reversal or modification of any of the existing administrative rulings. We submit that the reasoning and conclusion of that letter and subsequent rulings on the issue are consistent with the precedent identified in those ruling letters and by the petitioner. Thus, publication of a change of practice was not required.

Finally, the petitioner contends that the Customs Service has not held the cleaning of air scavenger spaces to be dutiable since 1982. Headquarters Ruling Letter 110911 was issued in response to an application for relief forwarded by the New York Vessel Repair Liquidation Unit (VRLU) following which we learned that from 1982 to 1990 the San Francisco VRLU had not been assessing duty whereas the two other regional VRLU's were. Absent a ruling letter or a published statement of position, we hold that the petitioner cannot rely on determinations made by the San Francisco VRLU to establish a position of the Customs Service. See Superior Wire v. United States, 7 Fed. Cir. (T) 43, 45-46, 867 F.2d. 1409, 1412-13 (1989).

As a result of the foregoing, the removal of carbon and oil deposits from the main engine scavenger spaces is a maintenance operation the cost of which is subject to duty under 19 U.S.C. 1466. Accordingly, the cost of this item ($ 22,760.00) is fully dutiable.

HOLDING:

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

Sincerely,


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