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HQ 112421

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September 6, 1995

VES-13-18 R:IT:C 112421 BEW

CATEGORY: CARRIER

Chief, Liquidation Section
U. S. Customs Service
P. O. Box 2450
San Francisco, California 94126

RE: Vessel Repair; M/V PRESIDENT EISENHOWER, Voyage 071; Entry No. C27-0061050-7, Modification; Inspection; Warranty; 19 U.S.C. §1466

Dear Sir:

This letter is in response to your memorandum dated July 27, 1992, which forwards for our review an application for relief from duties relating to the above-referenced vessel repair entry. Our review of this matter has been delayed pending the outcome of on-going litigation which has now been resolved.

FACTS:

The vessel PRESIDENT EISENHOWER, a U.S.-flag vessel owned and operated by American President Lines (APL) of Oakland, California, arrived at the port of San Pedro, California, on November 11, 1991. A vessel repair entry was timely filed. The vessel arrived from Yokohama, Japan, where it underwent extensive repair and modification procedures while in Taiwan, Korea and Japan, respectively. An application for relief from duties assessed pursuant to the vessel repair statute (19 U.S.C. 1466) was timely filed.

The applicant claims that the cost of administrative shipyard expenses has been segregated and that these non-productive overhead expenses should be considered to be non-dutiable. The overhead expense charge has been referred for our review on  the following items.

ITEM No. Description

509 Anchor
513 Ballast Tank inspection
513.2 ABS survey
514 Switchboards
515 Setting Tank
521 Tailshaft Survey
526 Gauging
529 Aux. Boiler inspection
528 Exhaust Gas Economizer

ISSUE:

Whether certain foreign shipyard procedures and costs, including overhead charges, are considered subject to duty.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466(a), 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, or vessels intended to be employed in such trade.

In Ruling 112965 dated December 23, 1993, we stated as follows:

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 repairs, i.e., the total cost or expense of the repair is dutiable. In contrast overhead relating to a non-dutiable item such as a modification is non-dutiable, i.e., the total cost of expenses of a non-dutiable item is non-dutiable. 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.

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

The aforementioned rulings held that "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 are included in the entry under consideration were considered dutiable.

In Headquarters ruling 113428 LLB, dated August 2, 1995, the issue of overhead charges was reconsidered. It was stated in that ruling that:

. . . , the denial of an earlier claim concerning the cost of "administrative charges" is protested. It is claimed that our findings which hold these costs to be dutiable are contrary to Treasusry Decision 39443, 43 Tres. Dec. 99 (1923).

In ruling 113428 LLB, the protest was granted citing the following:

The cited Treasury Decision is one in a line extending from the court decision United States v. George Hall Coal Company, 134 Fed. 10003, T.D. 26038 (1903). This case, among others, has been thoroughly discredited by the opinion issued by the Court of Appeals for the Federal Circuit in the case of Texaco Marine Services, Inc. and Refining and Marketing, Inc., v. United States, (Appeal No. 93-1354, decided December 29, 1994). Customs has determined, however, that the decision rendered in Texaco, supra, will only be applied from the decision date forward for all issues other than repair-related cleaning and protective coverings, therefore, the protest should be allowed in this case for administrative overhead charges. These types of charges will be held dutiable for all entries filed on or after December 29, 1994. In conjunction with the above ruling, we find the administrative overhead charges associated with the subject entry to be non-dutiable.

Pursuant to the "but for" test enunciated by the U.S. Court of Appeals in Texaco Marine Services, Inc. and Refining and Marketing, Inc., v. United States, (Slip Op. 93-1354, decided December 29, 1994), protective coverings necessitated by dutiable repairs are dutiable.

With regard to Item No. 502, the cost for the deck covering protection associated with this item is dutiable as a part of the repair cost (see Texaco, supra).

HOLDING:

Following a thorough review of the evidence submitted as well as analysis of the applicable law and precedents, we have determined that the Application for Relief should be allowed in part and denied in part as set forth in the Law and Analysis portion of this ruling.

Sincerely,

Arthur P. Schifflin
Chief

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