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HQ 112861

October 19, 1993

VES-13-18-CO:R:IT:C 112861 GOB

CATEGORY: CARRIER

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

RE: Vessel repair; 19 U.S.C. 1466; Petition; ULTRASEA, V-1

Dear Sir:

This is in response to your memorandum dated August 17, 1993, which forwarded the petition submitted on behalf of Sealift, Inc. ("petitioner").

FACTS:

The ULTRASEA, an American-flag vessel, underwent foreign shipyard operations at the Keppel Shipyards while in Singapore. After the completion of the work, the vessel arrived in the United States at Portland, Oregon on November 6, 1992. Vessel Repair Entry No. 718-0000421-1 was filed on November 12, 1992.

By letter dated April 20, 1993 (112604), we issued our ruling with respect to the petitioner's application for relief, which was granted in part and denied in part.

Petitioner's Claims

The petitioner states that the nature of the transportation charges should be clear from the invoice. It has submitted a statement from the shipyard that transportation charges as itemized on the invoice were for costs associated with the movement of materials between the vessel and various locations in the shipyard.

The petitioner claims that overhead expenses are not dutiable because they are not part of the actual repair work. It cites several Customs rulings in support of this claim.

The petitioner contends that all of the work done on the forepeak tank, the portable water tank, and the aft peak tank was
directly related to modifications of the tanks. It has submitted a description of the modifications to the tanks, as well as drawings and material lists.

The petitioner asserts that relief was denied with respect to several items such as life rafts, an economizer, and main condenser because the cleaning was allegedly performed "in conjunction with" dutiable repairs. It states that the cleaning had nothing to do with any repairs.

ISSUES:

(1) Whether transportation costs are dutiable pursuant to 19 U.S.C. 1466.

(2) Whether overhead costs are dutiable pursuant to 19 U.S.C. 1466.

(3) Whether the costs associated with the work performed on the forepeak tank, the portable fresh water tank, and the aft peak tank are dutiable pursuant to 19 U.S.C. 1466.

(4) Whether certain cleaning costs are dutiable pursuant to 19 U.S.C. 1466.

LAW AND ANALYSIS:

19 U.S.C. 1466 provides for the payment of duty at a rate of fifty 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 be employed in such trade.

Issue (1)

We have consistently held that transportation costs which are broken-out or segregated from repair costs are nondutiable. Accordingly, all transportation costs which are broken-out or segregated on the invoices are nondutiable. See CIE 941/60 and 1970/60 and C.D. 1836. Similarly, cranage costs are also nondutiable if they are broken-out or segregated on the invoices.

Issue (2)

It is Customs position that overhead relating to repair work is dutiable as part of the cost of the repair. Overhead is part of the shipyard's cost of doing business. The total shipyard cost of each repair item is dutiable; that total cost includes overhead.

Customs does not wish to see overhead broken-out or segregated as a separate item. Customs believes that overhead
should be included within the cost of the work performed, whether that work be a dutiable repair or a nondutiable modification. As stated supra, the total shipyard cost of each repair item is dutiable; that cost includes overhead.

In support of its position that the overhead is nondutiable, the petitioner has cited two previous rulings, Ruling 109308 dated May 26, 1988 and Ruling 108953 dated January 7, 1988.

In Ruling 112214 dated September 16, 1992, Customs stated as follows with respect to the overhead issue:

Upon further review of this matter, we are of the opinion that our interpretation of T.D. 55005(3) as set forth in ruling 111170 and discussed above is correct. Accordingly, rulings 108953 and 109308 are hereby modified to hold that the costs of "overhead" and/or "administrative" charges as described therein are dutiable in their entirety in the absence of an apportionment of such expense between dutiable and non-dutiable work.

The two rulings cited by the petitioner, Ruling 109308 and Ruling 108953, are not, and were not at the time they were issued, accurately reflective of Customs position. These two rulings were effectively overruled by Ruling 112214.

In the subject case, the petitioner's claim for relief on this issue is granted with respect to any overhead charges which are associated with nondutiable charges and which are clearly reflected as such on the pertinent invoices. The petition is denied with respect to all other overhead charges.

Issue (3)

In its application of the vessel repair statute, the Customs Service has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis- a-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a nondutiable modification, the following factors have been considered:

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel (See United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930)), either in a structural sense or as demonstrated by means of attachment so as to be indicative of the intent to be permanently incorporated.

2. Whether in all likelihood an item under consideration would remain aboard a vessel during an extended lay-up.

3. Whether, if not a first time installation, an item under consideration constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.

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

After a consideration of the evidence of record, we find that the costs of the work associated with the portable fresh water tank and the forepeak tank are nondutiable modifications.

The costs of the work associated with the aft peak tank are dutiable as repairs because the record indicates that this work was a repair. The pertinent invoice states in part:

Aft Peak Tank Repair

Modified/strengthened fwd area of aft peak tank iwo [sic] portable water tank including framing, floors, port and stbd forward and aft girders and bracketing at shell and underdeck framing. (Aft peak structure affected by weight of portable water tank resulting in damage to frame floors)

This work falls within the common definition and concept of a repair. Webster's Third New International Dictionary, 1961, defines the noun "repair" as the "restoration to a state of soundness, efficiency or health." The same source defines the verb "repair" as "to restore by replacing a part or putting together what is torn or broken...to restore to a sound or healthy state."

As indicated in Issue (2) supra, the overhead charges associated with the portable fresh water tank and the forepeak tank are nondutiable. The overhead charges associated with the aft peak tank repair are dutiable.

Issue (4)

The petitioner has asked for relief with respect to cleaning costs related to life rafts (item 343), the economizer (item 507), and the main condenser (item 510).

Customs position with respect to cleaning is that cleaning pursuant to a nondutiable modification or other nondutiable work
is nondutiable. Cleaning before or during dutiable repairs is dutiable. It is also Customs position that post-repair cleaning is dutiable; however, because the post-repair cleaning issue is currently pending before the U.S. Court of Appeals for the Federal Circuit ("CAFC") in Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, Customs has withheld ruling on that specific issue until the CAFC decides that case.

The life raft costs (item 343) are dutiable as repairs and equipment. The evidence does not reflect that any of these costs were incurred pursuant to an "ABS/USCG periodic inspection", as stated in the petition. The invoice merely states: "INFLATABLE LIFERAFTS - USCG INSPECTION." The cleaning costs associated with the life raft costs are dutiable.

We find that the cleaning costs associated with the main condenser (item 510) are dutiable. The item for main condenser testing, which is part of item 510 and which includes the supply and renewal of zinc anodes, is indicative of a repair. Accordingly, we find that the cleaning on the same item number is dutiable. We further note that the extensive nature of the cleaning on this item is indicative of a dutiable maintenance item.

We affirm our previous finding that the costs associated with the "Renewal of Economizer Elements" (item 507) are dutiable because they are repair items. The cleaning associated with this item is dutiable.

We note that there is no specific indication in the record that the cleaning discussed supra is post-repair cleaning. In the absence of evidence that the cleaning is post-repair cleaning, we will not withhold ruling on that item.

HOLDING:

As detailed supra, the petition is granted in part and denied in part.

Sincerely,

Arthur P. Schifflin
Chief

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