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HQ 226485





February 5, 1996

VES-13-08-RR:IT:EC 226485 GEV

CATEGORY: CARRIER

Chief, Liquidation Section
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94111

RE: Protest No. 2704-95-102456; Vessel Repair Entry No. C27-0054146-2; PRESIDENT KENNEDY; V-28; Protective Covering; Cleaning; Staging; Transportation; Modifications;
Administrative Costs; 19 U.S.C. ? 1466

Dear Sir:

This is in response to your memorandum dated September 25, 1995, forwarding the above-referenced protest with supporting documentation for our review. Our ruling is set forth below.

FACTS:

The PRESIDENT KENNEDY is a U.S.-flag vessel owned and operated by American President Lines, Inc. (APL). The vessel incurred costs for foreign repair work during March of 1991. Subsequent to the completion of this work the vessel arrived in the United States at San Pedro, California on April 14, 1991. A vessel repair entry was timely filed on April 16, 1991.

A timely filed application for relief was granted in part and denied in part pursuant to Headquarters Ruling 111829, dated December 17, 1991. A timely filed petition for review of the aforementioned ruling was granted in part and denied in part pursuant to Headquarters Ruling 112124, dated March 14, 1995.

The subject entry was liquidated on June 2, 1995. A protest requesting further review, dated August 7, 1995, was timely filed requesting relief for the following work appearing on Jurong Shipyard Limited invoice no. 16441, dated June 3, 1991:

Item No. 1-23 - Protective Floor Covering Item No. 3.1-3 - Staging
Item No. 3.3-11 - Staging
Item No. 3.6-9 - E.R. Exh. Louvers
Item No. 3.6-9 - E.R. Exh. Staging
Item No. 3.6-21 - Staging
Item No. 999-6 - B.T. Void Space - Clean
Item No. 3.6-7 - Cleaning in Funnel
Item No. 5.3-1 - Stack Extensions
Item No. 5.6-13 - P/S LT/HT Cooler
Item No. 5.4-10 - Transportation
Item No. 5.4-13 - Transportation
Item No. 5.6-29 - Staging
Item No. 5.6-29 - Transportation
All Administrative Charges appearing throughout the invoice.

Attached to the CF 19 and referenced therein is a letter from the protestant, dated July 31, 1995, detailing the claims for relief and enclosing the following: (A) a copy of Headquarters Ruling 112124, and (B) C-10 General Arrangement - Drawing HDW 230-0290-0202.

ISSUE:

Whether evidence is presented sufficient to allow the protest regarding the dutiability of certain foreign costs under 19 U.S.C. ? 1466.

LAW AND ANALYSIS:

Title 19, United States Code, ? 1466 (19 U.S.C. ? 1466), provides in pertinent part for the payment of an ad valorem duty of 50 percent of the cost of "...equipments, or any part thereof, including boats, purchased for, or the repair parts or materials to be used, or the expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States..."

Item No. 1-23 covers protective floor covering which, the protestant states, was located in accommodation spaces only. The protestant states that this covering was not located in any repair areas nor were any repairs performed in the accommodation spaces. Furthermore, it is contended that the reason for this covering was not for a repair, but rather to protect the accommodation spaces from heavy traffic by inspectors, surveyors and service representatives visiting the vessel during the yard availability. Consequently, the protestant states that the decision of the court in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d. 1539 is not applicable and the item should therefore be free of duty.

In Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the issue before the U.S. Court of International Trade (CIT) was whether costs for post-repair cleaning and protective coverings incurred pursuant to dutiable repairs constituted "expenses of repairs" as that term is used in 19 U.S.C. ? 1466. In holding that the costs at issue were dutiable as "expenses of repairs" the court adopted the "but for" test proffered by Customs; that is, these costs were an integral part of the dutiable repair process and would not have been necessary "but for" the dutiable repairs.

On appeal, the CAFC issued a watershed decision which not only affirmed the opinion of the CIT regarding the specific expenses at issue, but also provided clear guidance with respect to the interpretation of 19 U.S.C. ? 1466, hence, Customs administration of that statute. In upholding the "but for" test adopted by the CIT, the CAFC stated:

"...the language expenses of repairs' is broad and unqualified.
As such, we interpret expenses of repairs' as covering all expenses (not specifically excepted in the statute) which, but for dutiable repair work, would not have been incurred.
Conversely, expenses of repairs' does not cover expenses that would have been incurred even without the occurrence of dutiable repair work. As will be more clearly illustrated below...the but for' interpretation accords with what is commonly understood to be an expense of repair." 44 F.3d 1539, 1544.

In reaching the above determination, the CAFC steadfastly rejected the non-binding judicial authority relied upon by the plaintiff/appellant. Specifically, the court addressed the following: Mount Washington Tanker Co. v. United States, 505 F.Supp. 209 (CIT 1980) which held that transportation compensation for members of a foreign repair crew performing dutiable repairs was not dutiable as an expense of repairs; American Viking Corp. v. United States, 150 F.Supp. 746 (Cust.Ct. 1956) which held that the expense of providing lighting needed to perform a dutiable repair was not dutiable as an expense of the repair; and International Navigation Co. v. United States, 148 F.Supp. 448 (Cust.Ct. 1957) which held that transportation expenses for a foreign repair crew to travel to and from an anchored vessel being repaired was not dutiable as expenses of repairs. With regard to these three cases, the CAFC stated, "Seemingly, these expenses too would have been viewed as coming within the [vessel repair] statute if the court had used a "but for" approach." 44 F.3d 1539, 1547. The CAFC concluded, "Thus Mount Washington Tanker, like American Viking and International Navigation, was incorrectly decided." Id.

In addition to the above judicial authority, the CAFC discussed at length the case of United States v. George Hall Coal Co., 142 F. 1039 (1939), heavily relied upon by the plaintiff/ appellant, which held dry-docking expenses were not an expense of repair and therefore were not dutiable. Although this decision seemingly supported the position that the expenses at issue were
dutiable, the CAFC examined the rationale provided in a December 31, 1903, unpublished decision of the Department of Treasury Board of General Appraisers (Board) upon which the court's decision was based. It noted that, "...the Board held the dry-docking expense was not subject to the vessel repair duty because the Board found that the expense would have been incurred irrespective of whether or not dutiable repairs were performed." 44 F.3d 1539, 1546 The CAFC went on to state, "George Hall Coal simply stands for the proposition that expenses that would have been incurred irrespective of whether or not dutiable repairs are performed are not dutiable as an expense of repairs." Id. It therefore concluded, "...George Hall Coal is entirely consistent with the but for' interpretation of the statute." Id.

Recognizing that the decision of the CAFC was not only dispositive of the expenses at issue, but also instructive as to Customs administration of the vessel repair statute with respect to the interpretation of the term "expenses of repairs" contained therein, the Assistant Commissioner, Office of Regulations and Rulings, issued a memorandum to the Regional Director, Commercial Operations, New Orleans (file no. 113308) dated January 18, 1995, published in the Customs Bulletin on February 8, 1995 (Customs Bulletin and Decisions, vol. 29, no. 6, at p. 59) In that memorandum, copies of which were disseminated to two other Customs field offices charged with the liquidation of vessel repair entries, it was stated that pursuant to the decision of the CAFC, a myriad of foreign repair expenses previously accorded duty-free treatment would, under certain circumstances, no longer receive such treatment. The memorandum further provided that any such affected costs contained in vessel repair entries not finally liquidated as of the date of the CAFC decision (December 29, 1994) should be liquidated as dutiable "expenses of repairs" provided they pass the "but for" test discussed above.

Subsequent to the publication of the above memorandum, on February 22, 1995, various representatives of U.S.-flag vessel owners/operators, including the protestant, met with the Assistant Commissioner, Office of Regulations and Rulings. It was the collective opinion of the vessel owners/operators that the memorandum be rescinded, contending, inter alia, that it was violative of 19 U.S.C. ? 1625(c)(1) and 19 CFR Part 177. Upon further review of this matter, the Assistant Commissioner, Office of Regulations and Rulings, again issued a memorandum to the Regional Director, Commercial Operations Division, New Orleans (file no. 113350), dated March 3, 1995, published in the Customs Bulletin on April 5, 1995 (see Customs Bulletin and Decisions, vol. 29, no. 14, at p. 24) clarifying the January 18 memorandum with respect to Customs implementation of the CAFC decision. It provided that all vessel repair entries filed with Customs on or after the date of that decision are to be liquidated in accordance with the full weight and effect of the decision (i.e., costs of post-repair cleaning and protective coverings incurred pursuant to dutiable repairs are dutiable and all other foreign expenses contained within such entries are subject to the "but for" test). With respect to vessel repair entries filed prior to December 29, 1994 (such as the one currently the subject of this protest), all costs for post-repair cleaning and protective coverings incurred pursuant to dutiable repairs are dutiable. It further provided that in view of the fact that carriers have relied on Customs rulings (some of which were based on court cases which the CAFC in Texaco held were incorrectly decided), and retroactive application would cause both the Government and the carriers a major administrative burden,

Customs will not apply Texaco retroactively except as to the two issues directly decided by the court. All other costs contained within such entries are to be accorded that treatment previously accorded them by Customs prior to the decision of the CAFC in the Texaco case.

Parenthetically, we note that the CAFC decision was published in its entirety in the Customs Bulletin on March 8, 1995 (See Customs Bulletin and Decisions, vol. 29, no. 10, at p. 19).

In regard to Item No. 1-23, the shipyard invoice provides as follows:

"PROTECTIVE FLOOR COVERING"

"Covered the accommodation alleyways and designated cabins, messrooms and offices with polythene sheet and hard plywood during the repair period." (Emphasis added)

Assuming arguendo, as the protestant suggests, that no repair work was actually done to above-referenced alleyways, cabins, messrooms and offices, the shipyard invoice nonetheless provides irrefutable evidence that the cost of the protective covering in question was incurred pursuant to dutiable repairs performed on the vessel. Accordingly, the decision of the court in Texaco is applicable to the subject protest and Item No. 1-23 is therefore dutiable.

Item Nos. 3.1-3, 3.3-11, 3.6-9, 3.6-21 and 5.6-29 all cover costs for staging. The protestant states that staging costs, when identified and priced separately, are non-dutiable. While that statement is correct pursuant to Headquarters Rulings 105172 and 106713 for all pre-Texaco entries such as the one which is the subject of this protest, we note that the shipyard invoice upon which the subject staging costs are listed does not provide for the cost segregation to which the protestant refers. Rather, the staging covered by each of the aforementioned items, although described separately from some of the repair work listed thereunder, nonetheless is included with other dutiable work in one charged amount. Specifically, the cost for staging set forth in Item 3.1-3 also covers the tightening of anodes and the filling of bolt holes with cement, the costs for staging set forth in Items 3.3-11, 3.6-9 and 3.6-21 include the cost of painting, and the cost of staging in Item 5.6-29 includes the cost of repairing the cargo hold exhaust fan rotor (i.e., stripping off the winding, rewinding, varnishing, and renewing bearings). Pursuant to C.I.E.s 1325/58 and 565/55, relief may not be granted where the invoice does not show a breakdown of what is dutiable and what is not. Accordingly, the staging referenced in Item Nos. 3.1-3, 3.3-11, 3.6-9, 3.6-21 and 5.6-29 is dutiable.

Item 3.6-9 covers work entitled, "ENGINE ROOM EXHAUST FAN OUTLET." The shipyard invoice contains the following description with respect to this work: "Fabricated, cropped, fitted and welded louvers vent on the port side aft. of the funnel house." With respect to this item the protestant states that Headquarters ruling 112124 granted it duty-free status but it was made dutiable at the time of liquidation. We note that the petition referred to this item as a

"class item warranty modification." (See p. 3 of the petition letter dated January 17, 1992) It was therefore reviewed in light of the criteria for both a warranty item and a modification and denied as to the former but granted as to the latter. (See Headquarters ruling 112124, p. 5). Notwith-standing this determination, the work was liquidated as dutiable. This discrepancy therefore merits further review of this item.

With respect to warranty claims, Customs has in the past had occasion to consider the validity of warranty agreements, and has found that the cost of repairs performed pursuant to claimed warranty work is subject to vessel repair duty (see published Customs Service Decision (C.S.D. 81-50)). Consequently, the warranty claim for Item 3.6-9 was denied.

In regard to modification claims, Customs has held that modifications to the hull and fittings of a vessel are not subject to vessel repair duties. Over the course of years, the identification of modification processes has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification which is not subject to duty, the following elements may be considered.

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel (see United States v. Admiral Oriental Line et al., T.D. 44359 (1930)), either in a structural sense or as demonstrated by the means of attachment so as to be indicative of the intent to be permanently incorporated. This element should not be given undue weight in view of the fact that vessel components must be welded or otherwise "permanently attached" to the ship as a result of constant pitching and rolling. In addition, some items, the cost of which is clearly dutiable, interact with other vessel components resulting in the need, possibly for that purpose alone, for a fixed and stable juxtaposition of vessel parts. It follows that a "permanent attachment" takes place that does not necessarily involve a modification to the hull and fittings.

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 replaces a current part, fitting or structure which is not in good working order.

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

Very often when considering whether an addition to the hull and fittings took place for the purpose of 19 U.S.C. ? 1466, we have considered the question from the standpoint of whether the work involved the purchase of "equipment" for the vessel. It is not possible to compile a complete list of items that might be aboard a ship that constitute its "equipment". An unavoidable problem in that regard stems from the fact that vessels differ as to their services. What is required equipment on a large passenger vessel might not be required on a fish processing vessel or offshore rig.

"Dutiable equipment" has been defined to include:

...portable articles necessary or appropriate for the navigation, operation, or maintenance of a vessel, but not permanently incorporated in or permanently attached to its hull or propelling machinery, and not constituting consumable supplies. Admiral Oriental, supra., (quoting T.D. 34150, (1914))

By defining what articles are considered to be equipment, the Court attempted to formulate criteria to distinguish non-dutiable items which are part of the hull and fittings of a vessel from dutiable equipment, as defined above. These items might be considered to include:

...those appliances which are permanently attached to the vessel, and which would remain on board were the vessel to be laid up for a long period... Admiral Oriental, supra., (quoting 27 Op. Atty. Gen. 228).

A more contemporary working definition might be that which is used under certain circumstances by the Coast Guard; it includes a system, accessory, component or appurtenance of a vessel. This would include navigational, radio, safety and, ordinarily, propulsion machinery.

In regard to the modification claim for Item 3.6-9, upon reviewing the shipyard invoice it is readily apparent that all of the four criteria for a modification enumerated above have been met (the method of installation (i.e., welding) is indicative of permanent attachment, it would remain aboard the vessel during an extended lay up, it enhances the operation of the vessel, and the work is a new item as opposed to one that is replacing an existing defect). Accordingly, Item 3.6-9 meets the criteria for a modification and is therefore not dutiable.

Item 5.3-1 is entitled "SSDG EXHAUST PIPE EXTENSIONS". The shipyard invoice contains the following description with respect to this work: "The exhaust pipe from the 3 generators were [sic] modified by welding extensions to the existing as per specifications." An additional charge appearing under this item is as follows: "500 dia. X 2.5 mm x 9mmt x 1 length for boiler pipe extension." With respect to this item, the protestant states that Headquarters Ruling 112124 granted it duty-free status but it was made dutiable at the time of liquidation. We note that the petition referred to this item as a "Class warranty item." (See p. 4 of the petition letter dated January 17, 1992) It went on to state that "[t]he SSDG exhaust pipes and boiler pipe were extended to correct an original design deficiency...[i]t is therefore, an improvement." Id. Consequently, this item was reviewed in light of the criteria for both a warranty item and a
modification and denied as to the former but granted as to the latter. (See Headquarters ruling 112124, pp. 5-6) Notwithstanding this determination, the work was liquidated as dutiable. This discrepancy therefore merits further review of this item.

As stated above, with respect to warranty claims Customs has in the past had occasion to consider the validity of warranty agreements, and has found that the cost of repairs performed pursuant to claimed warranty work is subject to vessel repair duty (see published Customs Service Decision (C.S.D. 81-50)). Consequently, the warranty claim for Item 5.3-1 was denied.

In regard to the modification claim for Item 5.3-1, upon reviewing the shipyard invoice, it is readily apparent that all of the four enumerated criteria have been met (the method of installation (i.e., welding) is indicative of permanent attachment, the extensions would remain on board during an extended lay up, the work is not replacing a current part of the vessel not in good working order but is merely extending it, and it provides an enhancement in operation of the vessel). Accordingly, Item 5.3-1 meets the criteria for a modification and is therefore non-dutiable.

Item 999-6 is entitled, "BOW THRUSTER VOID SPACE CLEANING" and covered the removal of "...all the lub. oil, dirt and sand at bow thruster space." The protestant states that the subject cleaning "...was not cleaning for a repair, nor was it cleaning after a repair." Notwithstanding the inapplicability of the Texaco decision to the subject protest except for post- repair cleaning and protective coverings as discussed above, Customs long-standing position with respect to cleaning is that the charges for such services are dutiable if the cleaning is performed as part of, in preparation for, or in conjunction with dutiable repairs, or is an integral part of the overall maintenance of the vessel. (See C.I.E.s 18/48, 125/48, 910/59, 820/60, 51/61, 429/61, 569/62, 698/62, C.D. 2514, and T.D.s 45001 and 49531). In that regard we note that Item 3.1-7 of the shipyard invoice, entitled "BOW THRUSTER SEALS AND ANODES", specifies that the bow thruster was subjected to "maintenance works." Maintenance is dutiable under the vessel repair statute (see Headquarters rulings 111917). Accordingly, since the cleaning covered by Item 999-6 was performed in conjunction with dutiable work it is dutiable.

Item 3.6-7 is entitled, "Cleaning in Funnel." This cleaning was accomplished with a chemical detergent and removed soot, carbon and stains from "the areas of the main engine exhaust smoke stack generators and boilers, various vent pipes, decks, platform and access ladder approx 2500mm." (Emphasis added) Item 3.6-8 on the shipyard invoice is entitled "MAIN ENGINE EXHAUST STACK MODIFY AND RENEWAL" and covered repair work to the main engine exhaust smoke stack. Consequently, the cleaning in Item 3.6-7 was held dutiable as being done in conjunction with the repairs performed in Item 3.6-7. The protestant contends that the cleaning done in Item 3.6-7 "is not only poorly described, it is inaccurately described." Specifically, the protestant states that Item 3.6-8 has no relation to Item 3.6-7 since the "stack" referenced in the former is not the area that was cleaned in the latter. Aside from this bald claim, the protestant has submitted only a drawing (Enclosure B) depicting the area of the vessel to
which he is referring. The record is devoid of any documentation from the shipyard corroborating the protestant's contention that the shipyard invoice is inaccurate. Accordingly, in the absence of such evidence, Item 3.6-7 is dutiable.

Item 5.6-13 is entitled, "P/S LT/HT F.W. Cooler Cleaning." With respect to this item, the protestant states the following:

"The misunderstanding here occurs from item 5.6-14. Item 5.6-14 does not exist. It was canceled and there is no cost against item
5.6-14. Without item 5.6-14, item 5.6-13 becomes a straightforward cleaning item for inspection. There were no repairs performed."

The record does not support this claim. The invoice contains no information regarding the cancellation of Item 5.6-14 (which covers dutiable repairs related to the cleaning covered by Item 5.6-13). Furthermore, the protestant has submitted no documentation from the shipyard to that effect. Accordingly, in the absence of such evidence Item 5.6-13 is dutiable.

Items 5.4-10, 5.4-13 and 5.6-29 include charges for transportation. The protestant states that transportation costs, when identified and priced separately, are non-dutiable. While that statement is correct pursuant to C.I.E.s 204/60, 937/60, 1325/58 and C.D. 1836 for all pre-Texaco entries such as the one which is the subject of this protest, we note that the shipyard invoice upon which the subject transportation costs are listed does not provide for the cost segregation to which the protestant refers. Rather, the transportation covered by each of the aforementioned items, although described separately from some of the repair work listed thereunder, nonetheless is included with other dutiable work in one charged amount. Specifically, the costs for transportation set forth in Items 5.4-10 and 5.4-13 also cover overhauling the stator and renewing the bearings, and the cost for transportation set forth in Item 5.6-29 includes the cost of work done to the motor cover. Pursuant to C.I.E.s 1325/58 and 565/55, relief may not be granted where the invoice does not show a breakdown of what is dutiable and what is not. Accordingly, the transportation referenced in Item Nos. 5.4-10, 5.4-13 and 5.6-29 is dutiable.
Finally, the protestant cites Treasury Decision (T.D.) 39443 in support of its position that the cost of administrative overhead is not dutiable. That decision, among others, has been thoroughly discredited by the opinion of the U.S. Court of Appeals for the Federal Circuit in Texaco. Customs has determined 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. (See Headquarters memorandum 113350, dated March 3, 1995, published in the Customs Bulletin of April 5, 1995) Therefore, the protest should be allowed in this case for administrative overhead charges. (See Headquarters rulings 113085 and 113540) These same types of charges will be held dutiable for all entries filed on or after December 29, 1994.

HOLDING:

Following a thorough review of the evidence submitted as well as an analysis of the law and applicable precedents, we have determined that for the reasons stated in the Law and Analysis portion of this ruling, the protest under consideration must be granted in part and denied in part.

In accordance with ? 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to customs personnel via the Customs Ruling Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act and other public access channels.

Sincerely,

Director

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