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HQ 113707

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October 31, 1996

VES-13-18-RR:IT:EC 113707 GOB

CATEGORY: CARRIER

Port Director of Customs
Attn.: Vessel Repair Liquidation Unit, Room 415 P.O. Box 2450
San Francisco, CA 94126

RE: Vessel Repair Entry No. C27-0061057-2; PRESIDENT LINCOLN, V-87; 19 U.S.C. 1466

Dear Madam:

This is in response to your memorandum of August 15, 1996, which forwarded the petition for relief submitted on behalf of American President Lines, Ltd. ("petitioner") with respect to the above-referenced vessel repair entry.

FACTS:

The evidence of record indicates the following. The PRESIDENT LINCOLN ("vessel"), a U.S.-flag vessel owned and operated by the petitioner arrived at the port of San Pedro, California on November 26, 1991. The subject vessel repair entry was timely filed. The vessel underwent certain foreign shipyard work in Kaohsiung, PRC in October and November of 1991.

In Ruling 112444 dated May 22, 1996, which contained our determinations on the application for relief with respect to the above-referenced entry, we found certain items dutiable and certain items nondutiable.

The petitioner requests relief with respect to the following items: overhead charges, 515, 515.2 (first sub-item on p.31 and second sub-item on p. 32), 516 (second sub-item), 519, 519.1, 520, 525, 525.1, 530, 531 (first sub-item), 551, and 556.

ISSUE:

Whether the costs of the subject items are dutiable pursuant to 19 U.S.C. 1466.

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.

We note initially that this entry is a "pre-Texaco" entry, i.e., an entry filed prior to the appellate decision in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (CAFC 1994), aff'g 815 F.Supp. 1484 (CIT 1993). In Memorandum 113350 dated March 3, 1995, published in the Customs Bulletin and Decisions on April 5, 1995 (Vol. 29, No. 14, p. 24), we stated in pertinent part:

All vessel repair entries filed with Customs on or after the date of that decision [the CAFC decision in Texaco, December 29, 1994] 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, all costs for post-repair cleaning and protective coverings incurred pursuant to dutiable repairs are dutiable. 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 has now held were incorrectly decided), and retroactive application would cause both the Government and the carriers a major administrative burden, we 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.

In its application of the vessel repair statute, the Customs Service has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis-a-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a nondutiable modification, the following factors have been considered:

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel, either in a structural sense or as demonstrated by means of attachment so as to be indicative of a permanent incorporation. See United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930). However, we note that a permanent incorporation or attachment does not necessarily involve a modification; it may involve a dutiable repair.

2. Whether in all likelihood an item would remain aboard a vessel during an extended lay-up.

3. Whether an item constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.

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

Overhead Costs Because the entry at issue was filed prior to the C.A.F.C. decision in Texaco, we find that these costs are nondutiable pursuant to the authority of T.D. 39443 (1923). We note that our rulings with respect to entries filed on and after the date of the C.A.F.C. decision in Texaco, December 29, 1994, will follow the analysis of Ruling 112900 dated November 4, 1993, where we stated as follows:

As we stated in Ruling 112861, supra, 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.
...
...It is Customs position that the total cost or expense of a foreign repair is dutiable. That total cost includes overhead attributable to the repair. Overhead is part of the shipyard's cost of doing business. In many cases in various businesses, overhead expense incurred by the vendor is recouped by including a provision for it in other costs, such as the labor cost.

HOLDING: [of Ruling 112900]

The protest is granted only with respect to any overhead which is related to nondutiable items; that overhead must be included in the cost or expense of the nondutiable items or clearly reflected as related to such nondutiable items on the pertinent invoices. The protest is denied with respect to all other overhead. [end of excerpt from Ruling 112900.]

Item 515 The petitioner states: "No repairs were performed on this item. This is a segregated price item for handling the hatch covers only." We agree with the petitioner's claim. The invoice does not reflect a repair. It does reflect the removal and replacement of the hatch covers. This item is nondutiable.

Item 515.2 (first sub-item on p.31) In Ruling 112444, we stated as follows, in pertinent part:

The portion of item 515.2 consisting of modification of bearing pads is dutiable (note that ABS Report KS-7365-G describes the existing pads as "worn down" (see discussion of modifications in ruling HQ 112851 - qualifying modifications may not involve the replacement of a current part, fitting, or structure which is not in good working order).

The petitioner has not provided evidence to satisfactorily refute the evidence of record which states that the existing pads were worn down. That evidence indicates that the subject work is dutiable as a repair. Accordingly, we find that this item is dutiable.

Item 515.2 (second sub-item on p. 32) In Ruling 112444, we stated as follows, in pertinent part:

The portion of item 515.2 consisting of reinforcement of the bearing pads (with the addition of "stifference") is dutiable in the absence of satisfactory evidence to establish that it is a nondutiable modification (we note that it is not referred to in the ABS Reports).

The petitioner has not provided evidence to satisfactorily refute the evidence of record which indicates that this work involves a reinforcement of the bearing pads. That evidence indicates that the subject work is dutiable as a repair. Accordingly, we find that this item is dutiable.

Item 516 (second sub-item) The petitioner states that this item (tailshaft survey) is a mandatory regulatory inspection requirement. In its earlier application, the petitioner acknowledged the dutiability of the repairs in the third sub-item, which is not at issue here. The record indicates that the second sub-item, which is at issue here, does not include any dutiable elements and that it relates to the tailshaft survey. We find that it is nondutiable.

Items 519 and 519.1 The petitioner asserts that these items involve nondutiable structural modifications. The invoices indicate that this claim is substantiated. There is no indication of repair work on the specific invoices at issue. Accordingly, we find that these items are nondutiable.

Item 520 The petitioner claims that "no repairs were required on this item, and thus the cleaning was not performed in anticipation of repairs." As Ruling 112444 stated, it appears from the record that the work in this item was performed at least in part as preparation for dutiable repairs. Accordingly, we find that this item is dutiable.

Item 525 The record supports the petitioner's claim that this item is nondutiable. There is no indication of any repair on the invoice, nor is there evidence that this item was incident to repairs. Accordingly, we find that this item is nondutiable.

Item 525.1 As Ruling 112444 pointed out, this item includes the replacement of certain items, some of which were broken. Accordingly, this item is dutiable.

Item 530 The petitioner states that this item is a modification to reroute piping to an accessible location; the previous piping was not accessible for inspection. The invoice is consistent with this assertion. There is no indication of a repair. Accordingly, we find that this item is nondutiable.

Item 531 (first sub-item) The petitioner states that "Part 1 of this item covers the regulatory mandatory inspection...A non-dutiable requirement." The invoice is consistent with this assertion. There is no indication of a repair on this first sub-item. Accordingly, we find that the first sub-item of item 531 is nondutiable.

Item 551 This item was not included in the scope of the earlier application for relief. Pursuant to 19 CFR 4.14(d)(2)(i), a party may not petition for relief with respect to vessel repair items which were not included in the application for relief. Accordingly, the petition is denied with respect to this item. Pursuant to 19 CFR 4.14(f), a party may file a protest "...against the decision to treat an item or a repair as dutiable under paragraph (a) of this section..."

Item 556 As we stated in Ruling 112444, the invoice describes this item as "SALT WATER PIPING, REPAIRS ABS & USCG INSPECTION." (Emphasis supplied.) Thus, the invoice itself clearly reflects repairs. Under this circumstance, we are unable to conclude that this item does not include repairs. Accordingly, it is dutiable.

HOLDING:

The petition is granted with respect to the following items: overhead, 515, 516 (second sub-item), 519, 519.1, 525, 530, and 531 (first sub-item).

The petition is denied with respect to the following items: 515.2 (first sub-item p. 31), 515.2 (second sub-item p. 32), 520, 525.1, 551, and 556.

Sincerely,

Chief,
Entry and Carrier Rulings Branch

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