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HQ 112449


March 31, 1993

VES-13-18-CO:R:IT:C 112449 GFM

CATEGORY: CARRIER

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

RE: Vessel Repair; Modification; Warranty; One-Year Benchmark; Filing of Claim Under Warranty; Time Limit; Overhead; Gas Free Certificate; 19 U.S.C. 1466; M/V PRESIDENT TRUMAN V-29; Entry No. C27-0054121-5.

Dear Sir:

This letter is in response to your memorandum dated August 25, 1992, which forwards for our disposition a petition for review filed in conjunction with the above-referenced vessel repair entry.

FACTS:

The PRESIDENT TRUMAN is one of three C-10 class conbulk or "non-Panamax" vessels built for American President Lines, Ltd. (hereinafter APL) by Howaldtswerke-Deutsche Werft AG (hereinafter HDW) of Germany. The subject vessel was delivered to APL on April 22, 1988. From January 26 through February 18, 1991, the vessel underwent foreign shipyard operations at Kaohsuing, Taiwan and Kobe, Japan. Subsequent to the completion of the aforementioned work, the subject vessel arrived and made entry in the United States at San Pedro, California, on March 3, 1991.

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 percent 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 1-25 GAS FREE CERTIFICATES.....................$ 4,600.00

At the application stage, this item was incorrectly held dutiable. As petitioner correctly points out, the gas free certificate relates to the prevention of fire and explosion during welding and other hot-work operations. Oxygen verification procedures are a necessary corollary to some such operations as they serve to indicate sufficient oxygen levels in closed spaces. The costs associated with obtaining a Gas Free Certificate constitute ordinary and necessary expenses incident to repair operations and are thus dutiable. In liquidating these charges, such charges are to 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 charges applicable to items which are not being remitted. In the present case, as the certificates related to inspections, they should be pro-rated accordingly.

ITEM 4 (3.3-9) BALLAST TANK COATINGS................$ 75,000.00

This item represents charges for repairs made to ballast tank coatings which petitioner asserts should be covered under warranty. At the application stage, it was determined that because the applicant's claim was filed beyond the established reasonable period of time, the charges were dutiable. Petitioner now reasserts its contention that such repairs should be covered under warranty.

Customs has previously considered the scope and effect of the vessel repair statute as it relates to warranty clauses. 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 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. Each noted defect was recorded on a separate sheet and assigned a "G" guarantee number. Each was dated, signed by an owner's representative and a builder's representative, and contained a short narrative of the specific complaint.

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. See, Headquarters Ruling Letters 110499, 111082, 111081, 110503, and 111086.

In the case presently before us, petitioner claims that as an inspection occurred on April 19, 20, and 21, 1989 (less than one year from the April 22, 1988 delivery date of the vessel), the "one-year benchmark" has been met.

A review of the entire record reveals that an inspection of the ballast tanks and other vessel areas was indeed conducted by APL on April 19, 20, and 21, 1989. However, the results of that inspection and another inspection held on February 24-26, 1990, were not sent to HDW until July 16, 1990, when APL formally notified HDW of several ballast tank defects. Thereafter, in letter number 1586-JMD/HDW dated July 26, 1990, APL lodged a formal claim for insurance coverage under warranty for said ballast tank coatings. On October 11, 1990, in letter number 1597 TSW/HDW, APL again wrote to HDW advising them of their plans to repair said tanks at a theretofore undisclosed Asian shipyard in January-February, 1991. By letter dated October 14, 1990, HDW expressed disagreement with APL's findings and made an offer of compromise to settle the dispute for the sum of DM 30,000.00. Regarding petitioner's claim that the "one-year benchmark" has been met, we note that although inspections of the ballast tanks undertaken by APL occurred on April 19, 20, 21, 1989, APL did not notify HDW of the tank defects or its request for coverage under warranty until July 16, 1990. Thus, as some 15 months had passed before formal notification occurred, it is clear that APL's claim for remission is time-barred. Accordingly, as neither of petitioner's theories provides a basis for relief, the cost of this item ($ 75,000.00) is fully dutiable.

ITEM 3.8-17 #4 PORT HFO TANK REPAIR.................$ 400.00

This item represents charges for staging and coatings which were not separately segregated in the original application. Petitioner has herein submitted shipyard invoices showing a $ 395.00 charge for staging and a $ 95.00 charge for coatings. Accordingly, only that portion of the item relating to the coatings ($ 95.00) is dutiable.

ITEM 4.1-3 BOW THRUSTER CLEANING & INSPECTION.......$ 300.00

This item represents charges for cleaning operations which were held dutiable in the original application. As petitioner has herein submitted a document from the shipyard stating that said cleaning was performed pursuant to inspection, and not repair, the cost of the item ($ 300.00) is non-dutiable.

ITEM 3-3.10 HATCH COVERS AND COAMINGS
Sub-item (4)...................................$ 23,060.00 Sub-item (6)...................................$ 30,571.00

ITEM 3-3.14 HATCH #1 & #2 COAMINGS.................$ 1,020.00

These items represent charges for hatch cover fractures which are alleged to have occurred as a result of design defects. The record shows that petitioner timely notified the vessel vendor of said defects and that similar charges were afforded duty-free status in previous rulings relating to similar vessels of the same class. Petitioner claims that these so-called "repairs" are not repairs at all, but are design defects entitled to coverage under warranty. In light of our extension of non- dutiable treatment of the same defects in rulings relating to each of the other similar vessels, and as the required notification was made, we hold these too to be non-dutiable modifications and/or improvements to correct design deficiencies. Thus, the combined cost of these items ($ 54,651.00) is non- dutiable.

OVERHEAD CHARGES....................................$ 382,211.00

Each item listed in the petitioner's worksheet contains a separate charge for "Duty-free Overhead @ $17.00 per hour." In the application, such charges were found to be dutiable pursuant to 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].

Customs has held the term "emoluments" as used in the cited decision to include all wages, taxes, accounting fees, office space charges, inventory or mark-up costs, purchasing costs, and management fees. Consequently, general and unspecified "overhead" charges are considered dutiable.

In response to our holding, the petitioner has resubmitted a breakdown of the "overhead" charges in Exhibit A to include charges for clerical services, electronic data processing, accounting, insurance, general administration, education and corporate expense. In furtherance of his claim that these charges are non-dutiable, counsel for petitioner cites two prior Customs rulings (108953, dated January 7, 1988, and 109308, dated May 26, 1988) wherein Customs held the cost of clerical expenses (i.e., secretarial services, electronic data processing, accounting services, etc.) to be analogous to non-dutiable costs of drydocking and general services under C.I.E. 1188/60.

Although Petitioner has resubmitted the same cost breakdown for general services performed at the shipyard which are claimed to represent non-productive overhead charges, the burden of demonstrating the underlying justification for such charges and their relationship to specific repair operations has still not been met. The charges shown are attributable to the operation of the shipbuilding facility in general. Consequently, the cost of the item ($ 382,211.00) 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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