HQ 0112480 - Vessel Repair; Modification; Application; Segregation of Costs; Inspection; Testing; Drydocking Charges; Anchor Chains; Propeller; Transportation; Overhead; 19 U.S.C. 1466; M/V PRESIDENT GRANT; V-20; Entry No. 110-0104128-1. - United States International Trade Commision Rulings

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HQ 112480

March 16, 1993

VES-13-18 CO:R:IT:C 112480 GFM

CATEGORY: CARRIER

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

RE: Vessel Repair; Modification; Application; Segregation of Costs; Inspection; Testing; Drydocking Charges; Anchor Chains; Propeller; Transportation; Overhead; 19 U.S.C. 1466; M/V PRESIDENT GRANT; V-20; Entry No. 110-0104128-1.

Dear Sir:

This letter is in response to your memorandum dated September 23, 1992, which forwards for our review the application for relief filed in conjunction with the above-referenced vessel repair entry.

FACTS:

The vessel PRESIDENT GRANT arrived at the port of Seattle, Washington, on February 14, 1992, and filed a timely vessel repair entry. The entry indicates that the vessel underwent foreign shipyard work in Taiwan and Hong Kong during January and February of 1992. This application seeks relief from duty for various inspection, cleaning, repair, and modification charges incurred during vessel's dockage at said foreign shipyards.

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 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 1.1-1.3-2 GENERAL SERVICES.......................$ 353,050.00

These items represent charges for shore power, temporary lighting, telephone service, fire precaution, gas free certificate, crane service, handling charges, foot lift, supports, general cleaning, compressed air, fresh water, sanitary overboards, garbage removal, line handlers, tugs, engine room bilge, temporary generators, hook up and disc, generator labor, layberth, owner's spare parts, dockside trial, sea trial, attendance labor, and launch services which were all incurred relative to the drydocking of the vessel.

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.

Moreover, under the rationale provided by a long-standing published ruling (C.I.E. 1188/60) the cost of obtaining a gas free certification, a necessary precursor to the initiation of any hot work (welding) which may be necessary, constitutes an ordinary dutiable expense which is associated with repair operations. In liquidating such an expense, however, its cost is apportioned between those items which are remissible and those which remain subject to duty.

Accordingly, pursuant to the above authority, the charges associated with this item, insofar as they relate to the drydock operations exclusively, are non-dutiable.

ITEM 2.1-1-2.1-5 DRYDOCKING/INSPECTION................$ 206,728.00

These items represent charges for general drydocking and related inspections. Pursuant to the authority stated above, drydocking charges are non dutiable. With regard to periodic
surveys undertaken to meet the specific requirements of a classification society, insurance carrier, etc., their cost is not dutiable even when dutiable repairs are effected as a result thereof; however, in the liquidation process Customs should go beyond mere labels such as "continuous" or "ongoing" before deciding whether an item is dutiable. If an inspection or survey is conducted as a part of an ongoing maintenance and repair program, regardless of how it is labelled, the cost thereof is dutiable. Also, if the survey is to ascertain the extent of damage sustained, or to ascertain if the work is adequately completed, the costs are dutiable as part of the repairs which are accomplished pursuant to the holdings in C.I.E. 429/61, C.S.D. 79-2, and C.S.D. 79-277.

In the present case, it appears that the drydocking inspection is unrelated to repairs. Accordingly, it is not subject to duty.

ITEM 2.1-7 ANCHOR CHAINS/LOCKER......................$ 40,030.00

This item involves charges related to the inspection and painting of the anchor chains 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 exact nature of the item in question and the circumstances surrounding it are unclear from the evidence submitted. The ABS inspection reports indicate that repairs to the anchor were effected. Additionally, the anchor was painted. In light of these repair elements, it is not clear whether the inspection was accomplished to ascertain the effectiveness of repairs or whether the repairs were a result of the inspection. In any event, in accordance with C.S.D. 79-277, we hold these items to be dutiable incidents to repair absent credible evidence to the contrary. Accordingly, the cost of the item ($ 40,030.00) is dutiable.

ITEM 2.1-8 SEA VALVE INSPECTIONS.....................$ 74,660.00

This item involves the inspection of sea valves and sea chests pursuant to American Bureau of Shipping requirements. Applicant asserts that the charges included in this item should be classified as non-dutiable incidents to a required inspection. In accordance with the authority cited in the previous item, the item in question clearly constitutes a dutiable transaction. The so-called "inspection" under consideration includes charges for "clean[ing] all valve(s)," "grind[ing] in/fitting in same," and "remov[ing] and replac[ing]" parts. We note with interest that the charges for materials associated with this inspection (allegedly in which no repairs were made nor new parts installed) totalled $ 7,520.00. As this unusually high cost suggests something other than a simple inspection, in accordance with C.S.D. 79-277, we find that these items are not related to inspections, but are dutiable incidents to repair. Accordingly, the cost of the item is dutiable.

ITEM 2.1-9 SEA CHEST STRAINER INSPECTIONS............$ 9,600.00

This item involves the inspection of sea chests pursuant to American Bureau of Shipping and United States Coast Guard requirements which applicant asserts should be classified as non- dutiable incidents to a required inspection.

With regard to this item, the invoice included charges for "water-blasting and hand scraping" and "completion of the hull painting." In accordance with C.S.D. 79-277, these charges are not related to inspections, but are dutiable incidents to repair. Accordingly, the entire cost of the item is dutiable.

ITEM 2.1-10 PROPELLER................................$ 26,650.00

This item involves charges for propeller waterblasting and polishing rendered pursuant to ABS surveys. 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). From these authorities, we determine that the cost of propeller polishing is subject to duty under 19 U.S.C. 1466. The term deterioration is defined to mean degeneration, which in turn denotes declined function from a former or original state. See The American Heritage Dictionary of the English Language 376, 387 (2d ed. 1985). The principal function of the propeller is to efficiently displace water so that a vessel may propel and maneuver itself. The collection of marine deposits decreases this displacement causing reduced engine efficiency. Left unattended, these accumulated deposits may ultimately cause deterioration of the propeller. The removal of such deposits through scraping, wire brushing, wiping, or polishing results in a restoration of the propeller to good condition following a decline in its function. As such, such operations constitute maintenance. Accordingly, the charges for waterblasting and polishing the propeller are dutiable.

ITEMS 2.1-11 through 2.2-2 INSPECTION ITEMS..........$ 375,820.00

These items represent charges for various operations associated with inspections. In accordance with previously stated authority, with the exception of the $ 5,120.00 charge for staging, the remainder of the item is dutiable in full.

ITEM 3.1-1 HULL WASH.................................$ 73,330.00

This item represents charges for high-pressure water washing to the hull which applicant contends was performed pursuant to inspection. Viewed by itself, this item would not appear to be associated with repairs. However, we note that the items immediately following this relate to the gritblasting and painting of the hull. Circumstances such as these can cause items which by themselves are not considered to be repair operations, to become so when directly linked with dutiable procedures as seems to be the case here. Accordingly, in the absence of evidence to the contrary, we hold that the grit blasting of the hull was done in preparation for the painting of the hull and is thus considered dutiable.

ITEM 3.1-7 SEA CHEST SCOOP...........................$ 21,200.00

This item represents charges for repairs to the Main Scoop which are alleged to have been necessitated by damages which occurred during inspections. The invoice indicates that "mechanical chipping, wirebrushing, and * * * patching up with 'Belzonia' plastic compound," took place in Job #235, but no evidence was presented to show that these repairs remedied damages resulting from inspections. Absent such evidence, the cost of this item is dutiable.

ITEM 3.1-10 E.R. BALLAST CROSS OVER PIPE.............$ 112,750.00

This item represents charges for repairs made to the sea valves, main condenser overboard valve, main circulation pump discharge valve, main circulation pump packing gland and overboard inside forepeak. With the exception of the charge of $ 1,600.00 for cleaning associated with Job #232, the remainder of the operations in this item constitute repairs and are fully dutiable.

ITEM 3.3-1 HATCH COVER REPAIRS........................$ 341,945.00

This item represents charges for repairs made to the hatch covers. The invoice contains a $ 1,440.00 charge for "[l]ifting and shifting aside one off pontoon hatch cover (No. 12C) and replacing" and a $ 55,000.00 charge for "[r]emoving ashore and chocking up 19 off pontoon type hatch covers for carrying out repairs, lifting and returning to vessel and reinstalling hatch covers on completion."

Applicant seeks to have these items considered non-dutiable on the basis that they constitute 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 are thus, dutiable. Headquarters Ruling Letter 112211, June 30, 1992. With respect to the case at hand, the invoice contains consolidated transportation charges and includes charges for services which may not be included in transportation costs. Accordingly, the entire cost of the item ($ 341,945.00) is dutiable.

ITEM 4.1-11 TEST BALLAST PIPE SYSTEM.................$ 206,500.00

This item represents charges for various operations associated with inspections. In accordance with the authority cited previously in item 2.1-7, this item is dutiable in full.

ITEM 4.1-12 H.P. TURBINE INSPECTION Job #161.........$ 109,000.00

This item represents charges incurred in preparing the turbine for inspection. However, included in this item are charges for "restoration of disturbed insulation," "cover[ing] up opened turbine and protect[ing] by means of polyethylene covers," and "on completion of reassembly, standing-by ship's crew tests and proves main unit in operation." With regard to the "restoration..." and the "covering up...", such charges are repair elements and they are not segregated. Accordingly, those charges are dutiable. With regard to the testing of a unit which underwent restoration, it is well settled that according to C.S.D. 79-277, 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, is not exempt from duty. Additionally, we note that the remaining charges in Job 161 which involve "renewal" are also dutiable as repairs.

ITEM 4.1-12 MAIN STEAM STRAINER......................$ 4,500.00

This item involves operations performed pursuant to dismantling, cleaning and repairing the turbine pursuant to inspection. The invoice indicates that the joint landing was "skimmed up," and the valve was "boxed up with a new joint." 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. Here, as such non-segregated repair charges are present in the item, it is fully dutiable.

ITEM 5.1-7 P & S BOILER Job #230.....................$ 4,050.00

This item represents charges for providing a temporary portable pump and pumping out ballast pipe water. These operations were performed pursuant to maintenance painting and are therefore dutiable.

ITEM 3.3-16 CONTAINER LASHING D-RINGS
ITEM 3.3-34 F.O. LINE TESTS
ITEM 4.1-9 H.P. TURBINE FLEX COUPLING
ITEM 4.2-7 THRUST BEARING
ITEM 5.1-36 MEGGER TEST

The five items above are each considered a non-dutiable testing operation performed pursuant to inspection.

OVERHEAD............................................$ 1,094,278.00

The entry in question is accompanied by company-prepared worksheets which include a column marked as "Duty Free Overhead @ HK $ 18.876 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 those included in the entry under consideration must be 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,

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