HQ 0112965 - Vessel Repair; 19 U.S.C. 1466; Protest; M/V PRESIDENT POLK, V- 29; Entry No. C27-0054168-6; Modification; Warranty; Overhead - United States International Trade Commision Rulings

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HQ 112965

December 23, 1993

VES-13-18-CO:R:IT:C 112965 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; Protest; M/V PRESIDENT POLK, V- 29; Entry No. C27-0054168-6; Modification; Warranty; Overhead

Dear Sir:

This is in response to your memorandum dated November 17, 1993, which forwarded the protest submitted by American President Lines, Ltd. ("protestant"), seeking reliquidation of the above- referenced entry.

FACTS:

The vessel PRESIDENT POLK (the "vessel") arrived at the port of San Pedro, California on May 25, 1991, and filed a vessel repair entry. Foreign shipyard work was performed on the vessel while it was in Japan, Taiwan, Hong Kong, and Singapore.

In a decision dated March 25, 1992, Customs granted in part and denied in part the application for relief.

In a decision dated June 29, 1993, Customs granted in part and denied in part the petition for relief.

Protestant's Claims

The protest pertains to the following items:

Item No. Description

All items Administrative Overhead
3.2-6 Cargo Hold Cleaning
3.2-5 Hatch Coaming
3.3-10 Hatch Covers and Coamings
3.3-11 Cargo Hold D&H Vent Modification
3.3-14 Hatch #1 and #2 Longitudinal Coaming Terminations
3.3-20 Bottom Longitudinal at Fr 6 & 3

The protestant states that non-productive administrative overhead qualifies for remission of duty based on the statute, regulations, prior rulings, and court cases. It cites Ruling 108953 dated January 7, 1988 and Ruling 109308 dated May 26, 1988. The protestant has performed a "billing rate analysis", which constructs a billing rate which includes the following three elements: direct labor cost, overhead, and margin and profit.

The protestant states that the cargo hold cleaning is confined to the cargo tank tops and is not related to any other work in or about the cargo holds. It asserts that the cargo hold D&H vent modification is a nondutiable modification.

The protestant claims that the builder of the vessel has accepted the following items as warranty items and has made payment to it for the correction of the contract deficiency: hatch coaming; hatch covers and coamings; Hatch #1 and #2 longitudinal coamings terminations; and bottom longitudinal at frames 6 and 3.

ISSUE:

Whether the subject items 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.

After a consideration of the evidence of record, we make the following findings.

Overhead

As we stated in Ruling 112900 dated November 4, 1993 and Ruling 112861 dated October 19, 1993, it is Customs position that overhead relating to repair work is dutiable as part of the cost of the repair, i.e., the total cost or expense of the repair is dutiable. In contrast, overhead relating to a nondutiable item such as a modification is nondutiable, i.e., the total cost or expense of a nondutiable item is nondutiable. While Customs does not wish to see overhead broken-out or segregated as a separate item, our position on the dutiability of overhead, as stated supra, holds whether or not overhead is a separate item.

In Ruling 112861, we stated as follows:

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 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. [End of excerpt from ruling 112861.]

Thus, as stated in Ruling 112861 and Ruling 112900, Ruling 108953 and Ruling 109308 were effectively overruled by Ruling 112214, which was not cited by the protestant.

Our position herein is consistent with numerous other rulings issued in recent years, e.g., Ruling 111170 dated February 21, 1991 and subsequent rulings which cite Ruling 111170.

Accordingly, any overhead related to dutiable repairs is dutiable. Any overhead related to nondutiable items is nondutiable, provided that it is included in the cost or expense of
the nondutiable items or clearly reflected as related to such nondutiable items on the pertinent invoices.

Other Items

We find that item 3.2-6, cargo hold cleaning, is dutiable based upon the fact that the protestant has not established that this cleaning is unrelated to repairs. As we pointed out in Ruling 112418, major repairs were effected to certain of the cargo holds.

We find that item 3.3-11, cargo hold d & h vent modification, is nondutiable inasmuch as the record indicates this item was not a repair.

With respect to the protestant's warranty claim, we find that: item 3.3-20, bottom longitudinal at frames three and six, is dutiable; and items 3.2-5 (hatch coaming), 3.3-10 (hatch covers and coamings), and 3.3-14 (hatch one and two longitudinal coaming terminations) are nondutiable. The latter three items are nondutiable because the record indicates that: (a) the protestant advised the ship builder, by letter dated February 10, 1989, of "very serious failures in a number of main hatch cover girders on the C10 vessels", including the subject vessel; (b) the vessel was delivered on July 17, 1988; and (c) the ship builder reimbursed the protestant for the cost of these repairs pursuant to the guarantee or warranty clause of the contract. We find that there is a sufficient nexus between these three items, 3.2-5, 3.3-10, and 3.3- 14, and the substance of the February 10, 1989 letter. However, item 3.3-20 is dutiable because that repair is not included within the scope of the February 10, 1989 letter.

Warranty items are nondutiable if the record clearly establishes that: (a) the items are warranty items for new construction; (b) the ship owner or operator has notified the ship builder of the pertinent defects within one year of the delivery of the vessel; and (c) the ship builder acknowledges that the items are covered by the warranty and effects the repairs or reimburses the vessel owner or operator for the repairs.

HOLDING:

As detailed above, the protest is granted in part and denied in part.

The protest is granted with respect to item 3.3-11 (cargo hold d & h vent modification), item 3.2-5 (hatch coaming), item 3.3-10 (hatch covers and coamings), item 3.3-14 (hatch one and two longitudinal coaming terminations), and any overhead related to nondutiable items, provided that such overhead is included in the cost or expense of the nondutiable items or clearly reflected as related to such nondutiable items on the pertinent invoices.

The protest is denied with respect to item 3.2-6 (cargo hold cleaning), item 3.3-20 (bottom longitudinal at frames three and six), and any overhead which is not within the scope of the preceding paragraph.

Sincerely,

Harvey B. Fox
Director, Office of

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