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HQ 113730

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October 30, 1996

VES-13-18-RR:IT:EC 113730 GOB

CATEGORY: CARRIER

Port Director of Customs
Attn.: Chief, Residual Liquidation and Protest Branch U.S. Customs Service
6 World Trade Center
New York, NY. 10048-0945

RE: Vessel Repair Entry No. 514-3005449-7; S.S. RESOLUTE, V-87; 19 U.S.C. 1466; Drydock costs

Dear Sir:

This is in response to your memorandum dated October 11, 1996, which forwarded the application for relief filed by Farrell Lines Incorporated (the "applicant") with respect to the above-referenced vessel repair entry.

FACTS:

The record reflects the following. The S.S. RESOLUTE is a U.S.-flag vessel operated by the applicant. The vessel underwent foreign shipyard work in May 1996. The vessel arrived at the port of Port Elizabeth, New Jersey on June 13, 1996. The above-referenced vessel repair entry was timely filed.

The following items are at issue:

Malta Drydocks invoice no. 006067 - drydocking and general services (part I); tests, inspections, and surveys (part II); and staging/transportation (part III).

American Bureau of Shipping (ABS) invoice no. 580225 - surveys and expenses.

ABS invoice no. 580226 - gaugings and expenses.

ISSUE:

Whether the costs at issue 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.

Malta Drydocks Invoice No. 006067

A. Drydocking and General Services Costs (Part I)

In Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (CIT 1993), 44 F.3d. 1539, 1544 (CAFC 1994), the Court of Appeals for the Federal Circuit stated in pertinent part:

Texaco urges us to reject the Court of International Trade's "but for" approach and to interpret "expenses of repairs" so as to exclude those expenses (e.g., expenses for clean-up and protective covering work) not incurred for work directly involved in the actual making of repairs. Such a reading has no basis in the plain language of the statute, however. Aside from the inapplicable statutory exceptions, the language "expenses of repairs" is broad and unqualified. As such, we interpret "expenses of repairs" as covering all expenses (not specifically exempted in the statute) which, but for dutiable repair work, would not have been incurred. (Emphasis supplied.)

The subject vessel repair entry was filed after the CAFC decision in Texaco. 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).

In Ruling 113474, we stated in pertinent part:

A "but for" test was utilized by the court in the Texaco [case], supra, which test bases dutiability under the vessel repair statute upon findings that but for dutiable repair operations, an associated expense would not have been incurred. To be sure, in a great many vessel repair cases which include dry dock expenses there is at least some non-dutiable element which could justify placing a vessel in dry dock. We understand from the decision of the CAFC in Texaco, supra, that dock charges are non-dutiable if the underlying reason for dry-docking is not subject to duty, and that such charges are dutiable if dutiable operations underlie the docking. Proper implementation of the decision of the court requires that we consider the duty consequences in circumstances in which a mixed justification for dry-docking is present.

Customs has experience in duty determinations in another area involving a mixed-purpose vessel repair expense. Under the rationale provided by a long-standing published ruling (C.I.E. 1188/60) the cost of obtaining a gas-free certification, a necessary precursor to the initiation of any hotwork (welding) which may be necessary, constitutes an expense which is associated with shipyard operations. Since the expense is incurred without respect to whether the hot work to follow might constitute dutiable repair work, or is in connection with duty-free modification work, it is the practice of Customs in liquidating such expenses to apportion the gas-freeing charges between the cost of items which are remissible and those which are subject to duty. We are guided by the determination of the court in Texaco, supra, to apply the same formula to mixed-purpose dry-dock expenses. Accordingly, the cost associated with item 14 should be apportioned to reflect the dutiable and non-dutiable foreign costs in this entry.

The vessel repair entry at issue here was filed after the CAFC decision in Texaco. Accordingly, pursuant to our position as stated in Memorandum 113350, the entry at issue is to be liquidated in accordance with the full weight and effect of the Texaco decision, i.e., all foreign expenses (other than clearly dutiable repairs) are subject to the "but for" test.

In accordance with Ruling 113474 and Memorandum 113350, the drydocking charges should be prorated between the dutiable and nondutiable costs associated with the drydocking. The method of prorating was described in Ruling 113474, supra: the drydocking costs "should be apportioned to reflect the dutiable and non-dutiable foreign costs in this entry." For example, if, aside from the subject "drydocking costs," as described supra, fifty percent of the costs of that particular drydocking were dutiable and fifty percent were nondutiable, then fifty percent of the subject "drydocking costs," as described supra, would be dutiable and fifty percent would be nondutiable.

B. Tests, Inspections, and Surveys (Part II)

The heading of this part of the invoice states "Tests and Inspections." Tests and inspections are generally nondutiable provided that they do not involve repairs or are not incident to dutiable repairs. Accordingly, except as noted infra, the items in this part are nondutiable.

Item 14, boiler cleaning, is dutiable because it involves restoration and/or maintenance work, which we have held to be dutiable under 19 U.S.C. 1466. For example, the invoice states: "Jet blast cleaning to be supplemented with mechanical scaling to remove tenacious slag from superheater tubes." (Emphasis in original.) In Ruling 226737 dated March 12, 1996, where we found hull cleaning to be dutiable, we stated:

The pertinent invoice states that the hull cleaning was to remove salt deposits and marine growth from the hull of the vessel and that hand scraping of marine growth was performed. It seems clear that this work will enhance the operation of the vessel in terms of speed, efficiency of the hull, fuel efficiency, etc.

After a consideration of this matter, we determine that the hull cleaning is more akin to a restoration and/or maintenance item than it is akin to an item that involves no restoration or maintenance. The description of the work, including the removal of "salt deposits and marine growth" and "hand scraping marine growth," indicate to us that the work goes beyond "mere cleaning." The work performed is closer to a restoration of the hull to its former state and is an integral part in the overall maintenance of the vessel.

C. Staging and Inspection (Part III)

The applicant claims that the costs of staging and transportation on this part of the invoice are nondutiable. We agree with your belief that these costs are dutiable.

Pursuant to Texaco, these costs clearly would not have been incurred "but for" the dutiable repairs which pervade this part of the invoice. (Stated otherwise, the staging and transportation are costs incident to dutiable repairs.) Accordingly, the staging and transportation costs are dutiable.

ABS Invoice No. 580225

As your memorandum points out, the repairs, listed as item (e) in the application are dutiable.

Item (f) is for "Expenses" (application) or "Total Expenses" (invoice). In its application, the applicant states that these expenses "covered travelling expenses and secretarial services..." These costs are sometimes referred to as "overhead." Overhead is dutiable unless it is clearly reflected on the invoices as attributable to nondutiable items. This item is dutiable in its entirety since it would appear to relate, at least in part, to dutiable repairs, and since it is not broken-out between dutiable and nondutiable items.

ABS Invoice No. 580226

The invoice reflects that the work involved therein was "gaugings on behalf of underwriters," "gaugings review," and "gauging survey and review." There is no indication from the invoice that any dutiable items are involved, and this is an item that is typically nondutiable provided that no repairs are involved. Accordingly, we find that this item is nondutiable.

HOLDING:

As detailed supra, the application is granted in part and denied in part.

It is granted with respect to the tests and inspections in Part II of the Malta Drydocks Invoice No. 006067 (except for the boiler cleaning, which is dutiable) and with respect to ABS Invoice No. 580226.

It is denied with respect to Part I (to be prorated), Part II (boiler cleaning), and Part III of the Malta Drydocks Invoice No. 006067 and with respect to ABS Invoice No. 580225 (repairs and expenses).

Sincerely,

Chief,
Entry and Carrier Rulings Branch


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