HQ 0112789 - Vessel Repair; Inspection; Installation; Modification; Overhead; Segregation of Costs - United States International Trade Commision Rulings

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HQ 112789

August 18, 1993

VES-13-18-CO:R:IT:C 112789 DEC

CATEGORY: CARRIER

Deputy Regional Director
Commercial Operations
Pacific Region
One World Trade Center
Long Beach, California 90831

RE: Vessel Repair; Inspection; Installation; Modification; Overhead; Segregation of Costs
Vessel: ARCO JUNEAU
Vessel Repair Entry No. C31-0005026-0
Date of Arrival: March 6, 1993
Port of Arrival: Valdez, Alaska

Dear Sir:

This is in response to your memorandum dated June 28, 1993, which forwards for our consideration an application for relief from duties assessed pursuant to 19 U.S.C. 1466 filed in connection with the ARCO JUNEAU, vessel repair entry number C31-0005026-0. Our findings are set forth below.

FACTS:

The ARCO JUNEAU is an American-flag vessel owned by ARCO Marine, Inc. The vessel had foreign shipyard work performed during the period of August 2, 1993 - August 25, 1993. Subsequently, the vessel arrived in the United States at Valdez, Alaska on March 6, 1993, and a vessel repair entry was filed on the same day.

An application for relief dated May 20, 1993, was timely filed seeking remission from vessel repair duties. The items submitted to this office for review are set out below.

Item No. Description

108-B rudder nut-modification
111 chloropac piping
422 grab rail
443 pilot ladder
508 pump room strobe light
712 access manhole
714 butterworth opening
901 gyro compass installation
902 gas detection system
903 discharge strainer

904 cargo pump
908 fathometer
909 radar replacement
911 towing girder renewed
109 tailshaft inspection
301 turbine couplings
401-B scrubber unit
701 tank fracture
710 butterworth openings
906 boiler rear wall
907 cargo pipe pump room
ABS Survey various surveys
B.C. Taechang overhead charge

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 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.

The treatment of the respective invoices submitted for review are set out in detail below.

Invoice 108-B (rudder-nut modification)

The applicant contends that the costs documented under this invoice constitute a non-dutiable modification. In support of its contention, the applicant has submitted an invoice detailing the operations performed upon the rudder nut together with a statement that the new item does not constitute a restoration of the vessel due to damage or deterioration.

Over the course of years, the identification of modification processes has evolved from judicial and administrative precedents. In considering whether an operation has resulted in a modification, which is not subject to duty, the following elements may be considered.

(1) Whether there is a permanent incorporation into the hull or superstructure of a vessel (see United States v. Admiral Oriental Line et al., T.D. 44359 (1930)), either in a structural sense or as demonstrated by the means of attachment so as to be indicative of the intent to be permanently incorporated.

(2) Whether the item under consideration would remain aboard a vessel during an extended layup.

(3) Whether, if not a first time installation, an item under consideration replaces a current part, fitting or structure which is not in good working order.

(4) Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel.

Before an item is to be construed as a part of the vessel, it must be (1) a permanent attachment and (2) essential to the successful operation of the vessel. Otte v. United States, 7 C.C.P.A. 166, 169 (1916).

Customs is satisfied that the operation described in this invoice constitutes a non-dutiable modification which is not subject to vessel repair duty.

Invoice 111 (chloropac piping installation)

This item includes various operations connecting the chloropac piping to the service line. Upon completion of this work, the damaged coating was repaired.

Customs has held that painting existing portions of an existing vessel is in the nature of maintenance and is, therefore, a dutiable repair; whereas painting new sections and other alterations/modifications to the hull and fittings of a vessel is considered an integral part of the cost of the addition to the vessel and is not dutiable. Customs is satisfied that the operation described in this invoice meets the definition of a modification. Accordingly, this item is not subject to duty.

Invoice 422 (grab rail)
Invoice 443 (pilot ladder)
Invoice 508 (pump room strobe light)
Invoice 712 (access manhole)

Customs is satisfied that these operations constitute a permanent incorporation into the vessel. Accordingly, no duty is owed with respect to these items.

Invoice 710 and Invoice 714 (butterworth opening)

The applicant contends that these two invoices for the construction of the butterworth openings constitutes a non-dutiable modification. However, a closer examination of the invoices reveals that work performed on the existing pipes contained dutiable repairs. Specifically, the invoice makes reference to the "renewal" of all cover gaskets. Since the applicant did not document the
segregation of costs in these invoice, both invoices are dutiable in their entirety. Headquarters Ruling 108567 (Sept. 10, 1986).

Invoice 901 (gyro compass installation)

Customs is satisfied that the vast majority of the work described in this invoice constitutes a non-dutiable modification. However, the renewal of wiring is a dutiable operation. Since the cost of this repair is not segregated from the balance of the item, this complete invoice is deemed dutiable. Headquarters Ruling 108567 (Sept. 10, 1986). Unless and until the applicant can satisfactorily itemize the costs associated with each aspect of the invoice, this item is dutiable.

Invoice 902 (gas detection system)
Invoice 903 (discharge strainer)
Invoice 904 (cargo pump)

Customs is satisfied that the installation of these items constitutes a permanent incorporation into the vessel. Accordingly, no duty is owed with respect to these items.

Invoice 906 (boiler rear wall)

This invoice is for the renewal of insulation between the rear wall tubes and inner casings of the boiler as well as for the re- tiling of the rear wall of the port and starboard boilers. These operations clearly fall within the purview of 19 U.S.C. 1466 and are dutiable. Absent authenticated evidence stating the basis for finding the re-tiling a modification, the presumption is that this operation was carried out to restore deterioration. This same analysis applies to the insulation renewal. Consequently, this item is subject to vessel repair duty. The segregated staging, transportation, ventilation, lighting, and rigging costs are not subject to duty.

Invoice 907 (cargo pipe room)

This invoice is similar to Invoice 906 in that it contains various operations which involve the renewal of various parts of the vessel. Specifically, the invoice refers to the renewal of four penetrations at the suction level, the renewal of piping, the replacement of gaskets (presumably due to wear), and the renewal of risers. These items clearly describe repair operations. Accordingly, the operations contained in this invoice are dutiable pursuant to 19 U.S.C. 1466. The segregated staging, transportation, ventilation, lighting, and rigging costs are not subject to duty.

Invoice 908 (fathometer)
Invoice 909 (radar replacement)
Invoice 911 (towing girder renewed)

Invoice 908 describes the operation to be performed as "work to renew Owner's furbished new hull transducer" and Invoice 909 describes the work to be performed as a renewal of the vessel's radar. In addition, Invoice 911 describes various renewal operations with respect to the installation of the new towing system. Customs has consistently held that in order for an operation to be a repair there must be a restoration or a making over; the word "repair" contemplates an existing structure which has become imperfect by reason of the action of the elements or otherwise. Admiral Oriental Line v. United States, T.D. 44886 (1931). In this case, it is clear from the invoice that both of these operations were carried out in an effort to restore the fathometer (Invoice 908), the radar (Invoice 909), and the towing girder system (Invoice 911). Absent evidence of segregating non- dutiable costs from dutiable costs, these items are dutiable pursuant to 19 U.S.C. 1466. The staging and transportation costs associated with Invoice 909 and Invoice 911 are not subject to duty.

Invoice 109 (tailshaft inspection)

This invoice is for the operations performed on the vessel in connection with the tailshaft inspection and the stern tube after seal renewal. The invoice contains itemized costs for staging and rigging which are not subject to the assessment of vessel repair duties. The balance of the invoice, however, is subject to duty. Customs reaches this conclusion based on our review of the numerous items some of which the applicant clearly acknowledges as repairs. The remainder of the invoice is dutiable because it contains many items which are ordinarily considered dutiable and because there is no documentation depicting separate charges for each item. When there are no supporting documents segregating costs, Customs holds the entire invoice dutiable. In particular, Customs finds items h, m, n, and p subject to vessel repair duty. Unless and until the applicant can produce authenticated documentation of the cost of each item, the entire invoice is dutiable.

Invoice 301 (turbine couplings)

The applicant contends that no duty is owed with respect to the cost of the inspection of the flexible couplings. In C.S.D. 79- 277, the Customs Service addressed the dutiability of inspections and surveys stating that "[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 has been utilized by vessel owners seeking relief not only from charges appearing on an ABS or U.S. 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 C.S.D. 79-277, Customs 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.

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 ABS). Moreover, we note that C.S.D. 79- 277 does not exempt from duty 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 found to be necessary by reason of the required survey.

Following the rules set forth above, the Customs Service finds that while the ABS inspection and testing of the couplings is not subject to duty, this entire invoice is dutiable because it contains dutiable items, but fails to segregate dutiable items from non- dutiable items. Specifically, the Customs Service finds to "hone off edges," "to refit the casing with new gaskets," and to "renew joint packing" to be dutiable repairs absent evidence to the contrary. Accordingly, this entire invoice is subject to vessel repair duties.

Invoice 401-B (scrubber unit)

This invoice reflects the costs associated with preparations for a Coast Guard inspection and related repairs performed in anticipation of the inspection. Customs is satisfied that the segregation of costs between the inspection preparation and actual repairs is sufficient proof upon which to make a determination of dutiability. Accordingly, Customs finds that the three hundred sixty dollars ($360) listed in the invoice as repairs is dutiable and the balance of the invoice is duty-free.

Invoice 701 (tank fracture)

This invoice reflects the operations performed in connection with the vessel's tank fractures. Customs is satisfied that the segregation of costs between the inspection preparation costs, staging, ventilation and lighting, and actual repairs is sufficient proof upon which to make a determination of dutiability. Accordingly, the thirteen thousand nine hundred seventy-six dollars ($13,976) is dutiable and the balance of the invoice is duty-free.

American Bureau of Shipping (surveys)

The costs included in this invoice are for ABS inspections. Customs has consistently treated regulatory-required surveys not to be subject to the vessel repair statute. Accordingly, no duty is owed with respect to this invoice.

B.C. Taechang (overhead charges)

Customs has had occasion to consider the dutiability of so- called "overhead" charges (see Headquarters Ruling 111170 (Feb. 21, 1991). In that ruling, we cited a published Treasury Decision of long standing (T.D. 55005(3) (Dec. 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:

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,

Acting Chief

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