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HQ 112983

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March 14, 1995

VES-13-18-CO:R:IT:C 112983 BEW

CATEGORY: CARRIER

Regional Director
Commercial Operations Division
423 Canal Street
New Orleans, Louisiana 70130-2341

RE: Vessel Repair; Petition; M/V INGER, V-62; Entry No. C20-0038607-1; Surveys; Currency; Removal of Debris19 U.S.C. 1466

Dear Sir:

This is in reference to your memorandum that transmitted a petition from Sealift, Inc., requesting relief from the assessment of vessel repair duties in the above-captioned entry.

FACTS:

The vessel INGER underwent drydocking, survey, and repair operations in a foreign shipyard during the period of September 26 through October 23, 1992. A timely application for relief was filed. Following a review of the relevant documentation, the application for relief was denied by your office. The petition has been referred to Customs Headquarters for determination regarding the dutiability of the invoices relating to American Bureau of Shipping surveys.

We are asked to review the dutiability of the survey operations, in light of a prior Headquarters ruling (112145).

ISSUE:

Whether the evidence demonstrates that certain survey work and charges, should be excused from the assessment of vessel repair duties under existing law and precedent.

LAW AND ANALYSIS:

Title 19, United States Code, section 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 trades.With regard to the dutiability of the work preparatory to the conduct of the American Bureau of Shipping (ABS) survey under consideration, we note the following. C.S.D. 79-277 stated, "[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 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, the C.S.D. 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 the 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 under the C.S.D. 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 American Bureau of Shipping). 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.

Turning to the case before us, upon review of the survey documents we find the survey to be of the type required by classification societies to maintain a vessel in its class and service. Further, we note that, unlike the circumstances cited in C.S.D. 79-277, there is no repair element shown in four of the nine items under consideration (Drydocking survey, annual survey - hull, annual survey - machinery, and annual load line inspection). With regard to the remaining five items (tailshaft survey, special periodical survey - hull No. 10, special periodical survey - machinery & electrical equipment, boiler survey and repairs survey, we find that the need for repair is suggested and that these items are therefore dutiable.

Pursuant to the "but for" test enunciated by the U.S. Court of Appeals for the Federal Circuit in Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, Slip Op. 93-1354, decided December 29, 1994 (affirming the decision of the U.S. Court of International Trade at 815 F.Supp. 1484 (1993)), post-repair cleaning and protective coverings for repair work are dutiable under 19 U.S.C. § 1466. Accordingly, the subject costs for removal of debris and protective coverings are dutiable.

We concur with your finding as it relates to the currency issue.

HOLDING:

Following a thorough review of the evidence submitted as well as an analysis of the applicable law and precedent, we have determined to allow the petition in part and to deny it in part, as specified in the Law and Analysis portion of this ruling.

Sincerely,

Arthur P. Schifflin

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