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HQ 226520

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February 5, 1996

VES-13-7/ 13-18-RR:IT:EC 226520 IOR

CATEGORY: CARRIER

Chief, Liquidation Section II
U.S. Customs Service
Post Office Box 2450
San Francisco, CA 94126

RE: Protest No. 3001-95-100541; Vessel Repair Entry No. 110-0104128-1; PRESIDENT GRANT, V-120; administrative overhead; cleaning; inspection; propeller; hull high pressure water wash; transportation; Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States

Dear Sir:

This is in response to your memorandum dated October 23, 1995, forwarding a protest of HQ 112869 on the above-referenced vessel repair entry. Our decision on this matter is set forth below.

FACTS:

The President Grant is owned by American President Lines, LTD of Oakland, California. The subject vessel underwent foreign repairs in Taiwan and Hong Kong, B.C.C. during January, 1992. Subsequent to the completion of these repairs the vessel arrived in the United States at Seattle, Washington, on February 14, 1992. A vessel repair entry was filed on the same date. Two previous requests for administrative relief were considered by Customs Headquarters (HQ 112480 dated March 16, 1993 and HQ 112869 dated March 14, 1995). Presently, the dutiability of four charges is being protested. The protested items are:

1) Item 2.1-10 Propeller waterblasting $ 2,100.00 2) Item 3.1-1 Hull high pressure water wash $73,330.00 3) Item 3.3-1 Hatch covers $ 1,
440.00 $ 55,100.00
4) All Administrative/overhead charges $779,057.00

All amounts are in Hong Kong dollars.

Items 1-3, upon being previously considered, were found to be dutiable for failure to segregate dutiable from non-dutiable elements and for lack of evidence that the charges were not incurred for repair and maintenance. No new evidence or documents have been submitted.

ISSUE:

Whether the costs at issue are dutiable pursuant to 19 U.S.C. ?1466.

LAW AND ANALYSIS:

Title 19, United States Code, ?1466 (a), provides in pertinent part, for payment of duty at a rate 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 be employed in such trade.

1) ITEM 2.1-10 PROPELLER WATERBLASTING.... $2,100.00

This item involves a charge for propeller waterblasting rendered pursuant to an ABS survey. The protestant directs our attention to a January 29, 1992 ABS Report on Drydocking Survey, which indicates that, among other items, the propeller was "cleaned as necessary, examined and considered satisfactory. The invoice identifies the item as "Propeller ABS/USCG Inspection" and describes the item as "waterblasting both sides of propeller blades and hub to facilitate interest parties inspection." The protestant contends that the propeller must be cleaned to base metal before it can be inspected.

In analyzing the dutiability of foreign vessel work, the Customs Service has consistently held that cleaning is not dutiable unless it 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. E.g., HQ 110841 dated May 29, 1990 (and cases cited therein). The Customs Service considers work performed to restore a part to good condition following deterioration or decay to be maintenance operations within the meaning of the term repair as used in the vessel repair statute. See generally, HQ 106543, dated February 27, 1984; C.I.E. 142/61, dated February 10, 1961.

The dutiability of maintenance operations has undergone considerable judicial scrutiny. The United States Court of Customs and Patent Appeals, in ruling that the term repair as used in the vessel repair statute includes "maintenance painting," gave seminal recognition to the dutiability of maintenance operations. E. E. Kelly & Co. v. United States, 55 Treas. Dec. 596, T.D. 43322 (C.C.P.A. 1929). The process of chipping, scaling, cleaning, and wire brushing to remove rust and corrosion that results in the restoration of a deteriorated item in preparation for painting has also been held to be dutiable maintenance. States Steamship Co. v. United States, 60 Treas. Dec. 30, T.D. 45001 (Cust. Ct. 1931). The term deterioration is defined to mean degeneration, which in turn denotes declined function from a former or original state. See, The American Heritage Dictionary of the English Language 376, 387 (2d ed. 1985). The principal function of the propeller is to efficiently displace water so that a vessel may propel and maneuver itself. The collection of marine deposits decreases this displacement causing reduced engine efficiency. Left unattended, these accumulated deposits may ultimately cause deterioration of the propeller. The removal of such deposits through scraping, wire brushing, wiping, or polishing results in a restoration of the propeller to good condition following a decline in its function. In HQ 112480, we concluded that the removal of marine deposits from a propeller results in a restoration of the propeller to good condition following a decline in its function, and as such, constitutes maintenance. We have not been provided with any evidence to support a different conclusion.

Certain vessel inspection operations are generally considered non-dutiable. Where periodic surveys are undertaken to meet the specific requirements of, for example, a governmental entity, a classification society or insurance carrier, the cost of the surveys is not dutiable even when dutiable repairs are effected as a result thereof. C.S.D. 79-277. 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, we 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.

It is important to note that only the cost of opening the crane was exempted from duty 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 labeled "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.

With respect to the case before us, we have concluded that the waterblasting of the propeller constitutes maintenance following deterioration, and as such falls within the meaning of the term repair as used in the vessel repair statute. In HQ 112045 dated March 10, 1992, we stated that cleaning operations which remove rust and deterioration or worn parts, and which are a necessary factor in the effective restoration of a vessel to its former state of preservation, constitute vessel repairs (citing C.I.E. 429/61). Accordingly, we find that the work performed in item 2.1-10 goes beyond mere cleaning, and constitutes maintenance within the meaning of repair. No evidence has been provided to show that the work in item 2.1-10 was done solely or primarily to facilitate the ABS inspection. Therefore the charges for waterblasting the propeller are dutiable. The Protest is denied with respect to this item.

2) ITEM 3.1-1 HULL HIGH PRESSURE WATER WASH....$73,330

This item is included in Invoice Section/ Item 3.1 which covers "Hull and Underwater Repair and Maintenance." Items included in this section which immediately follow this item, relate to the gritblasting and painting of the hull. In HQ 112480 we stated that although by itself this item would not appear to be associated with repairs, absent evidence that the item was not done in preparation for gritblasting and painting the hull, it is considered dutiable. The same reasoning was followed in HQ 112869. Although no additional evidence has been provided, since HQ 112869 was issued, we have issued HQ 113470 dated July 5, 1995. In HQ 113470 we found that a cost incurred for a hull high pressure water wash constitutes a non-dutiable inspection-related charge rather than a dutiable repair. As in the instant case, according to the invoices, the item was followed by hull painting preparation. Although hull washing alone prior to painting can be dutiable, in this case the invoice provides sufficient evidence to hold that item 3.1-1 was solely or primarily for the purpose of the ABS inspection. We conclude that the high pressure water wash of the hull in this case is a non-dutiable inspection-related charge rather than a dutiable repair. The Protest is granted with respect to this item.

3) ITEM 3.3-1 HATCH COVERS....$1,440.00 and $55,100.00

This item represents charges for a) "lifting and shifting aside one off pontoon hatch cover (No. 12C) and replacing" and b) "remove ashore and chocking up 19 off pontoon type hatch covers for carrying out repairs, lifting and returning to vessel and reinstalling hatch covers on completion...." The protestant claims remission of these expenses on the grounds that they are transportation, cranage and handling expenses, which do not involve any disassembly, reassembly or preparation for shipment. In addition, the protestant states that Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994) is not retrospectively applicable to this entry, with respect to this transportation item. The protestant is correct in its assertion that Texaco Marine Services is not retrospectively applicable to this entry on this issue. With respect to vessel repair entries filed prior to December 29, 1994, and not fully liquidated prior to that date, Customs has determined that Texaco Marine Services is retrospectively applicable only to costs for post-repair cleaning and protective coverings incurred pursuant to dutiable repairs.

As we stated in HQ 112480, "transportation" does not include operations relative to preparing the item for shipping. Labor for such services as removing a part from its housing or mounting, or disconnecting an item, etc. does not constitute transportation and is dutiable. The costs incurred with respect to this item are dutiable because the record does not reflect that these costs are solely for transportation and cranage, as discussed in HQ 112869 and 112480. We have not received any additional evidence that would cause us to reach a different conclusion. The Protestant has not established that "lifting" and "removing" the hatch covers do not involve removing or disconnecting the parts from their housing or mounting. The Protest is denied with respect to this item.

4) ALL ADMINISTRATIVE/ OVERHEAD CHARGES....$779,057.00

This item concerns the cost of administrative shipyard non-productive overhead expenses. In HQ 112480 and 112869 we stated that it is Customs position that shipyard overhead costs are included in the cost of the dutiable repair. However, in HQ 113085 dated March 23, 1995, we stated that as the decision rendered in Texaco Marine Services, supra, will be applied from the decision date (December 29, 1994) forward for all issues except for repair-related cleaning and protective coverings, the protest should be allowed for administrative overhead charges. These same charges will be held dutiable for all entries filed on or after December 29, 1994. As this entry was made prior to the Texaco Marine Services decision, remission of this item should be allowed, and the Protest is granted with respect to this item.

HOLDING:

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

Consistent with the decision set forth above, you are hereby directed to deny the subject protest. In accordance with Section 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, with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of 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 Rulings Module in ACS and the public via the Diskette Subscription Service, Freedom of Information Act, and other public access channels.

Sincerely,

Director
International Trade

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