HQ 0112066 - Vessel Repair Entry No. C49-0021777-8; U.S. Parts; Inspections; Maintenance; Cleaning; Scavenger Air Spaces; M/V SAMUEL L. COBB; V-116 - United States International Trade Commision Rulings

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HQ 112066

January 18, 1994

VES 13-18 CO:R:IT:C 112066 GEV

CATEGORY: CARRIER

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

RE: Vessel Repair Entry No. C49-0021777-8; U.S. Parts; Inspections; Maintenance; Cleaning; Scavenger Air Spaces; M/V SAMUEL L. COBB; V-116

Dear Sir:

This letter is in response to your memorandum dated January 6, 1992, which forwards for our review and consideration the above- referenced application for relief from duties assessed pursuant to 19 U.S.C. 1466. Our findings are set forth below.

FACTS:

The record reflects that the M/V SAMUEL L. COBB, a vessel owned by Wilmington Trust Company and operated by Ocean Shipholdings, Inc., arrived at the port of Guayanilla, Puerto Rico, on August 13, 1991. Vessel repair entry number C49-0021777-8 was filed on the same day as arrival indicating work performed on the vessel in Singapore; Malta; Priolo, Sicily; Killingholme, United Kingdom; Donges, France; and Tarragona, Spain.

An application for relief was timely filed on October 11, 1991. The areas under Customs Headquarters review consist of the following:

1. Dasic Marine Invoice no. 7133 relating to parts that were allegedly purchased in the United States.

2. Work performed pursuant to a vessel inspection.

3. Malta Invoice Item 2.4(MDD500) relating to the inspection and polishing of the propeller.

4. Malta Invoice Item 6.1(MDD515F) relating to the cleaning of the scavenge, piston spaces, and reed valves.

5. Malta Invoice Item 6.1(MDD519J) relating to the cleaning of internals after completion of work in crank case.

These above areas under Customs Headquarters review consist of issues referred by the Vessel Repair Liquidation Unit and include costs associated with post-repair cleaning (i.e., Malta Invoice Item 6.1(MDD519J)). This latter issue is identical to an issue currently in litigation, and is the subject of a letter from the applicant in which it is stipulated that the applicant will not further contest a Customs finding of dutiability. In light of this factor, this item will be liquidated as dutiable and will not be the subject of further consideration in this decision.

ISSUE:

Whether the costs for which the applicant seeks relief are dutiable under 19 U.S.C. 1466.

LAW AND ANALYSIS:

Title 19, United States Code, 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 foreign or coastwise trade, or vessels intended to engage in such trade.

1. Dasic Marine Invoice no. 7133 covers parts that were allegedly purchased in the United States and shipped foreign for installation. The applicant claims these parts should be accorded duty-free treatment.

The Customs and Trade Act of 1990 (Pub. L. 101-382), which amended 19 U.S.C. 1466, exempts from duty under the statute, the cost of spare repair parts or materials which have been previously imported into the United States as commodities with applicable duty paid under the Harmonized Tariff Schedule of the United States (HTSUS). The amendment specifies that the owner or master must provide a certification that the materials were imported with the intent that they be installed on a cargo vessel documented for and engaged in the foreign or coasting trade.

The certification required by 19 U.S.C. 1466(h)(2) as to the vessel's documentation (foreign or coasting trades) and service, will be made by the master on the vessel repair entry (CF 226) at the time of arrival. The fact of payment of duty under the HTSUS for a particular part must be evidenced as follows. In cases in which the vessel operator or a related party has acted as the importer of foreign materials, or where materials were imported at the request of the vessel operator for later use by the operator, the vessel repair entry will identify the port of entry and the consumption entry number for each part
installed on the ship which has not previously been entered on a CF 226. In cases in which the vessel operator has purchased imported materials from a third party in the United States, a bill of sale for the materials shall constitute sufficient proof of prior importation and HTSUS duty payment. This evidence of proof of importation and payment of duty must be presented to escape duty and any other applicable consequences.

In addition, we require certification on the CF 226 or an accompanying document by a person with direct knowledge of the fact that an article was imported for the purpose of either then- existing or intended future installation on a company's vessels. Ordinarily, the vessel's master would not have direct knowledge of that fact, and an agent may also be without such knowledge.

Customs has in the past linked this duty remission provision to the duty assessment provision in subsection (a) of the statute. In the face of argument to the contrary we have held that a two- part test must be met in order for remission of duty to be granted: first, that the article must be of U.S. manufacture; and second, it must be installed by a U.S. resident or regular vessel crew labor. The reason for this position is that (d)(2) refers to "such equipments or parts...", etc., without any other logical placement for the word "such" occurring in that subsection. We inferred that "such" articles must refer to those installed under subsection (a), absent any other reasonable predication. The new amendment puts this issue to rest; it is clear that as concerns foreign-made parts imported for consumption and then installed on U.S. vessels abroad, the labor required for their installation is separately dutiable. A part may now be considered exempt from vessel repair duty albeit the foreign labor cost is dutiable.

Uniform treatment will be accorded to parts sent from the United States for use in vessel repairs abroad, regardless of whether they are proven to be produced in the U.S., or have been proven to have been imported and entered for consumption with duty paid. In both cases, the cost of the materials is duty exempt and only the cost of foreign labor necessary to install them is subject to duty. Crew member or U.S.-resident labor continues to be free of duty when warranted.

The effective date of this amendment makes this section applicable to any entry made before the date of enactment of this Act that is not "finally liquidated" (i.e., for which a timely protest was filed or court action initiated) on the date of enactment of this Act, and any entry made--

(A) on or after the date of enactment of this Act, and
(B) on or before December 31, 1992

Since the subject entry has not been "finally liquidated" as noted above, the new 1466(h)is applicable to this entry as it relates to spare parts.

In regard to the documentation submitted with this application, we find that the subject parts were purchased and installed on the vessel in May 1991. The invoice submitted (Exhibit 1) indicates that Dasic Marine is not a third party in the United States as discussed above but rather was the direct purchaser of these parts; therefore, a bill of sale is not sufficient proof of prior importation and HTSUS duty payment. We further find that the application does not contain evidence of a consumption entry number for each part installed and the name of the U.S. port of importation. In addition, the documentation is contradictory inasmuch as the invoice clearly indicates a foreign purchase with payment going to a foreign entity yet the applicant has obtained a letter (Exhibit 1a) from the U.S. affiliate of the foreign vendor which states that the foreign invoice represents a U.S. purchase and has certified that the parts in question were purchased in the United States (Exhibit 1b). Accordingly, in view of the above, we find that the parts listed on the Dasic Marine Invoice are dutiable.

2. Shipyard "Inspection" Costs.

In regard to the dutiability of inspection/survey costs, we note that C.S.D. 79-277 stated 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 American Bureau of Shipping (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 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, or insurance carrier is not dutiable even when dutiable repairs are effected as a result of such a 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 were necessary. Although the invoice indicated 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 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 repair work done by a shipyard in preparation of a required survey from duty. 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.

3. Malta Invoice Item 2.4(MDD500) relating to the inspection and polishing of the propeller and claimed to be a non-dutiable cleaning.

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- 6 -
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.

In regard to the work involving the propeller listed under Malta Invoice Item 2.4(MDD500), we concur with the applicant that it was not done as part of, in preparation for, or in conjunction with dutiable repairs. The work consisted only of those activities necessary for removal of the propeller for inspection and placing it back on the shaft. The invoice did not indicate that the polishing involved was pursuant to the propeller's restoration. (see Customs Ruling 112755, dated June 22, 1993) Accordingly, we find the cost of this item to be non-dutiable.

4. Malta Invoice Item 6.1(MDD515F) relating to the cleaning of the scavenge, piston spaces, and reed valves.

We are not in accord with the applicant regarding the work specified under this particular item. 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 - 7 -
reaffirm our position that cleaning air scavenger spaces is a maintenance operation that is subject to duty under 19 U.S.C. 1466. Accordingly, Malta Invoice Item 6.1(MDD515F) is dutiable.

HOLDING:

The costs for which the applicant seeks relief are dutiable in part under 19 U.S.C. 1466 as discussed in the Law and Analysis portion of this ruling.

Sincerely,

Arthur P. Schifflin

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