HQ 0113029 - Vessel Repair; 19 U.S.C. 1466; PRESIDENT MADISON, V-180; Entry No. 110-0104113-3; Protest; Overhead; Casualty; Volcanic Ash - United States International Trade Commision Rulings

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HQ 113029

March 22, 1994

VES-13-18-CO:R:IT:C 113029 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; PRESIDENT MADISON, V-180; Entry No. 110-0104113-3; Protest; Overhead; Casualty; Volcanic Ash

Dear Sir:

This is in response to your memorandum dated February 4, 1994, which forwarded the protest and application for further relief submitted by American President Lines, Ltd. ("protestant") with respect to the above-referenced entry.

FACTS:

The record reflects the following. The PRESIDENT MADISON ("vessel") is a U.S.-flag vessel owned and operated by the protestant. Certain foreign shipyard work was performed on voyage 180. The vessel arrived at the port of Seattle, Washington on August 23, 1991 and subsequently filed a vessel repair entry.

By Ruling 112079 dated May 22, 1992, the application for relief was granted in part and denied in part.

By Ruling 112442 dated August 19, 1993, the petition was granted in part and denied in part.

In its protest and application for further relief, the protestant asks for further relief with respect to the following items:
Item No. Description

2.1-5 Ranging of Anchor Chains
3.1-9 Staging for Rudder Repairs
3.2-15 Hydro Test Piping
3.6-48 Load Testing of Lifeboats
5.2-23 Main Tube Oil Cooler Cleaning
7.0-1-8 Volcanic Ash Repairs all items Overhead

ISSUES:

Whether the subject items are dutiable pursuant to 19 U.S.C. 1466. Whether duty on the volcanic ash repairs is subject to remission pursuant to 19 U.S.C. 1466(d)(1).

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.

Ranging of Anchor Chains

The invoice which was originally submitted showed a cost of HK$13,600 for "Anchor Chains - ABS/USCG Inspection." The protestant subsequently broke down the cost as follows:

Range/Inspection...HK$12,540.00
Marking & Seizing... 1,060.00

The protestant states in part as follows:

...the cleaning of the anchor chains was for anchor chain inspection and not for the marking of the shots. ...
Consistently, Customs has ruled that ranging anchor chains for inspection by ABS is non-dutiable when subsequent marking and repair costs have been segregated and priced separately.

While we believe that the dutiable status of this item is not totally clear, we find in this case that the cost of the ranging of the anchor chains is most properly found to be nondutiable.

Staging for Rudder Repairs

This cost in the amount of HK$4,770 is nondutiable. Staging is nondutiable when it is segregated.

Hydro Test Piping

The record reflects that this item is for air pressure testing and that it is not related to any repairs. Accordingly, it is nondutiable.

Load Testing of Lifeboats

The protestant states that:

The U.S. Coast Guard requires this weight test be performed at each occasion for reissue of a certificate of inspection and at least once in each two-year period.

The invoice for this item, no. 3.6-48, reflects that certain repair work was performed on the lifeboats, e.g., "renewing total of 16 off bracket plates...refitting lifeboat fall wires." While we believe that the dutiable status of this item is not totally clear, we find that the cost of this item is most properly found to be nondutiable.

Main Lube Oil Cooler Cleaning

The protestant states that this item is "a straight forward cleaning operation" which is unrelated to any repairs. The invoice supports this claim. Accordingly, this item is nondutiable.

Volcanic Ash

In Ruling 112442 dated August 19, 1993, referred to supra, we stated with respect to the volcanic ash issue:

This office has previously held that foreign repairs to this vessel resulting from the Mount Pinatubo volcano were compelled by casualty. Headquarters Ruling Letter 111879, dated January 24, 1992. We denied the application because the entry under consideration was filed for repairs made during a voyage subsequent to the voyage during which the vessel experienced the casualty.

The petitioner contends that the damage caused by the volcanic ash occurred after the vessel had called in the United States and commenced the subject voyage. The petitioner claims that the vessel did not bypass United States shipyards and that the vessel was in a seaworthy condition when it left the United States...
...
...The petitioner, however, fails to cite any specific problems that developed during the course of the subject voyage. Rather, the work to correct the volcanic ash damage appears to be general in nature. Moreover, statements made by the petitioner in the application for relief filed for this entry indicate that the work to repair the volcanic ash damage was deferred, thus suggesting that the repairs could have been performed in the United States. The vessel operator chose for commercial reasons to have the vessel repaired in a foreign shipyard:

Without resorting to the unprecident [sic] event of taking the vessel out of service for an extended period of time, the repairs were deferred to the pending drydock availability...To do otherwise would have been
detrimental to the entire commercial operation of the vessel and would have resulted in unacceptable loss of revenue.
(Emphasis supplied.)

In the subject protest, the protestant states:

It is true that a casualty did occur. It has been well- documented and acknowledged by Customs. It is also true that an intervening voyage did occur between the date of the casualty and the subsequent repairs. It is unquestioned that MADISON sailed on Voyage 180 from Seattle in a seaworthy condition...
...
During the course of these regulatory-required surveys, numerous items of machinery and equipment were opened up for inspection. These inspections revealed damage clearly attributable to the volcanic ash casualty...The failures were in the nature of a hidden or latent damage, similar to that found in Headquarters Ruling 105674 L.L.B. dated July 19, 1982.

After a reconsideration of this issue, we find no basis upon which to make a finding which differs from our previous findings in Rulings 112079 and 112442 on this issue. As we stated in Ruling 112442, excerpted supra, the protestant stated in its application for relief in this case that the work to repair the volcanic ash damage was deferred, indicating that such repairs could have been performed in the U.S. This eliminates the use of 19 U.S.C. 1466(d)(1), which applies only when repairs are necessary to secure the safety and seaworthiness of the vessel to enable her to reach her port of destination in the United States.

We note that the evidence of record, as described supra, indicates that the repairs at issue were not hidden or latent, but were deferred for financial reasons.

We note further that we typically do not find hidden or latent defects to be remissible pursuant to 19 U.S.C. 1466(d)(1). In Ruling 110499 dated June 7, 1990, we stated:

It is the intention of Congress, as reflected in the record of hearings concerning amendments to sections 3114 and 3115 of the Revised Statutes of the United States (the predecessor provisions to 19 U.S.C. 1466(a) and (d)), that the statute not recognize latent defects...
...
The quoted legislative history amply demonstrates that latent defect will not excuse duty under the statute.

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.

HOLDING:

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

Sincerely,

Harvey B. Fox
Director, Office of

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