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HQ 113740

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April 9, 1997

VES-13-18-RR:IT:EC 113740 GEV

CATEGORY: CARRIER

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

RE: Protest No. 3001-96-100753; Vessel Repair Entry No. 110-6461683-9; PRESIDENT JEFFERSON; V-312/313; General Services; Proration; Repairs;
19 U.S.C. ? 1466; Texaco Marine Services, Inc., and Texaco Refining and
Marketing, Inc. v. United States, 44 F.3d 1539 (1994)

Dear Sir:

This is in response to your memorandum dated October 24, 1996, forwarding the above-referenced protest. Our ruling is set forth below.

FACTS:

The PRESIDENT JEFFERSON is a U.S.-flag containership owned and operated by American President Lines, Inc. ("APL"). The subject vessel encountered heavy weather while en route on a loaded passage from Seattle, Washington, to Yokohama, Japan, during December 7-20, 1994, resulting in damage to the foremast, containers on board, and various deck fittings. Temporary and some permanent repairs were performed by the crew at sea and at Yokohama where the vessel arrived on December 21, 1994. The vessel departed Yokohama on the same day of its arrival and then proceeded to Hyundai Mipo Dockyard Co., Ltd. in Ulsan, Korea, where it incurred foreign shipyard expenditures during December 31, 1994 - January 12, 1995. Subsequent to the completion of the work in question, the vessel arrived in the United States at Seattle, Washington, on February 4, 1995. A vessel repair entry was timely filed.

Pursuant to an authorized extension of time, an application for relief with supporting documentation was timely filed. Customs rendered its decision on the application for relief pursuant to ruling letter 113501, dated October 24, 1995. A petition for review of the aforementioned ruling, dated January 12, 1996, was timely filed. Pursuant to ruling letter 226729,
dated June 7, 1996, Customs rendered its decision on the aforementioned petition. The subject entry was forwarded for liquidation which occurred on July 19, 1996. The protest, dated October 16, 1996, was timely filed.

The protestant alleges that Customs ruling on the petition (i.e., ruling letter 226729) was misapplied. In this regard it is claimed that the total non-dutiable amount (exclusive of the items designated to be pro-rata) of Item nos. 202-412 is $87,237.00, not $75,263.00 as shown on the worksheet. This difference of $11,974.00 is accounted for in the ruling which recognizes Item nos. 218-223 as being duty-free in the total amount of $11,974.00. In addition, the dutiable treatment and proration of the general service expenditures (Item nos. 002-123 (excluding Item no. 113) and Drydock Item no. 201) are protested. Finally, the following Item nos. are alleged to be non-dutiable: 113 (Dock Trial); 229 (Hatch Covers); 335 (Main Lube Oil Cooler); 336 (SSTG Lube Oil Cooler); and 412 (Bow Thrusters).

ISSUE:

Whether the protest should be granted.

LAW AND ANALYSIS:

Title 19, United States Code, ? 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..."

At the outset we note that upon reviewing the protestant's contention that the Headquarters decision on the petition (ruling letter 226729) was misapplied (see the first paragraph on p. 1 of the protest), we agree that such a misapplication did occur. The reliquidation of this entry will be corrected accordingly.

With respect to Item nos. 002-123 (excluding Item no. 113) and Item no. 201, such costs cover the following general services/drydocking expenses incurred during the period of time the subject vessel was in the shipyard:

Item No. 002 - Insurance
Item No. 007 - Security
Item No. 101 - Lay Berth
Item No. 102 - Telephone Services (including the overseas calls in question)
Item No. 103 - Fire Watch
Item No. 104 - Fireline Water
Item No. 106 - Garbage Removal
Item No. 107 - Crane Service
Item No. 108 - Shore Power

Item No. 109 - A/C and Provisional Reefer Cooling Water Item No. 110 - Fresh Water Supply
Item No. 112 - Tugboats/Pilots
Item No. 114 - Ship's Service Air
Item No. 116 - Engine Room Bilge Pumping to Holding Tank
Item No. 117 - Gas Free Certificate
Item No. 118 - Temporary Lighting and Ventilation Item No. 121 - Steam Heat to Quarters
Item No. 122 - Distilled Water Supply
Item No. 123 - Reballast Vessel to Undock Item No. 201 - Drydock Vessel - ABS/USCG Inspection

The above costs were held to be dutiable on a pro rata basis. With respect to this assessment, the protestant states that, "...Customs has still not given any statutory, regulatory or case law support for a pro rata application of duty." (See protest at p. 2) In response to this statement, we reiterate our position as set forth in our decision on the petition (ruling letter 226729); that is, such treatment is well-founded in all three of the aforementioned authority inasmuch as each authorizes Customs assessment of duty on the "expenses of repairs". (See 19 U.S.C. ? 1466(a), 19 CFR ? 4.14(a), and Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (CIT 1993), 44 F.3d 1539 (CAFC 1994))

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 U.S. Court of Appeals for the Federal Circuit (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.

The CAFC discussed at length the case of United States v. George Hall Coal Co., 142 F. 1039 (1906), heavily relied upon by the plaintiff/appellant for the proposition that drydocking expenses are not an expense of repair and therefore are not dutiable. It is noteworthy that the published decisions in George Hall Coal (T.D. 24932 (1904), aff'd 134 F. 1003, T.D. 26038
(1905), aff'd 142 F. 1039, T.D. 27068 (2nd Cir. 1908)) address jurisdictional issues and are silent as to the dutiability of drydocking expenses. 44 F.3d 1539, 1545 at fn. 5 However, the CAFC examined the rationale provided in a December 31, 1903, unpublished decision of the Department of Treasury Board of General Appraisers (Board) which is the underlying decision in the aforementioned published cases. The CAFC stated that this examination was necessary because "...subsequent decisions of the Court of International Trade and its predecessor, the Customs Court, have viewed George Hall Coal as standing for the proposition that the cost of a place to do work (i.e., a drydock) is not dutiable as an expense of repairs, which in fact it does not." 44 F.3d. 1539, 1546 at fn. 6 In examining this decision the court 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.

With respect to the general service expenditures covered by Item nos. 002-123 (excluding Item no. 113) and Item no. 201, the protestant states as follows:

"APL's position is that the initial and crucial question is whether the expenses in question would have been incurred even without the occur- rence of dutiable repair work. Thus, if the vessel would have to be put up on blocks in a drydock for purposes of a required mandatory inspect- ion, the "but for" test is set and the expenses are not "expenses of repair."
Conversely, if the expenses are those which, but for dutiable repair work, would not have been incurred, then they are expenses of repair and dutiable
(unless specifically excepted in the statute)." (See protest at p. 3)

The issue as framed above is followed by the statement that, "The drydocking was an expense that would have been incurred even without the occurrence of dutiable repair work.'" (See protest at p. 3) The protestant then concludes, "Thus, it meets the but for' test and should be non-dutiable." (See protest at p. 3) It is the absence of factual analysis coupled with the lack of evidentiary support which undermines the protestant's position.

In regard to the protestant's claim, we note that American Bureau of Shipping (ABS) invoice no. 605085J018 contained within the record indicates that the following surveys were performed: intermediate; drydocking; tailshaft; and boiler. Pursuant to "ABS Rules for Building and Classing Steel Vessels 1992 PART 1 - Classification, Testing and Surveys" submitted by the protestant, these surveys are mandatory inasmuch as they are required to be completed within certain time frames which vary according to the specific survey involved (see ?? 1/3.1.4, 1/3.2.1, 1/3.13.1, and 1/3.15.1, of the aforementioned publication, respectively). Consequently, under the "but for" test in Texaco, supra, "general services" conducted pursuant to these surveys would be non-dutiable inasmuch as "...the expense would have been incurred irrespective of whether or not dutiable repairs were performed." 44 F.3d at 1546 We further note, however, and the protestant does not dispute, that dutiable repairs were performed during the time the subject vessel was drydocked. This is evidenced not only by the Hyundai Mipo Dockyard Co., Ltd., invoice, but also by the aforementioned ABS invoice which lists hull and machinery repairs surveys. These latter two surveys were necessitated by the incidence of actual repair work rather than being mandated by the ABS based on the mere passage of time. As such, the general services charges in question are attributed, in part, to dutiable costs. The protestant has therefore not met the "but for" test with respect to these charges.

In recognizing the inequities owing to a total assessment of duty on expenses that are also attributed, in part, to non-dutiable costs, on p. 8 of Headquarters Ruling 113474, dated October 24, 1995, Customs 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 hot work
(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 now under consideration which, as stated above, covers "mixed-purpose" expenses, was filed after the CAFC decision in Texaco. In Headquarters 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 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 accordance with Headquarters Ruling 113474 and Memorandum 113350, the general services/drydocking charges in question, should be prorated between the dutiable and nondutiable costs associated with the drydocking. This is in accord with C.I.E. 1188/60 which states, in pertinent part, "In liquidation, this charge [of obtaining a gas-free certificate] should be apportioned between the costs which are to be remitted and those for which relief is not warranted and duty assessed on that portion of the charge applicable to items which are not being remitted." Therefore the general services expenditures appearing in Item nos. 002-123 (excluding Item no. 113) and Item no. 210 should be apportioned between the dutiable and non-dutiable costs contained within this entry.

Item no. 113 is entitled, "DOCK TRIAL" and provides as follows:

"Provide additional mooring for carrying out four hour dock trial upon completion of main engine and auxiliary support system inspections, and modifications. Gangway to be swung clear of vessel, and propeller and bow thruster tunnel areas to be kept clear. Necessary personnel, according to normal yard practice, are to be kept in attendance during this trial."

With respect to Item no. 113, it is the position of the protestant that the cost thereof pertains to Item nos. 320, 323, 324 and 325 which were held by Customs to be non-dutiable. Upon further review of this matter, we are in accord with this position. Accordingly, Item no. 113 is non-dutiable.

Item 229 is entitled, "HATCH COVER GASKET REPAIR" and provides as follows:

"Remove all hatch covers ashore or to floor of the drydock. Block up covers and clean for underside inspection. Inspect all hatch covers and report to owners superintendant [sic]. Any authorized repairs to be covered under a point' item." (Emphasis added)

The protestant states that no repair work is included in this item, but rather it is a cost incurred solely to remove and return the covers to and from a suitable area for inspection purposes. Despite the fact that repairs are not covered by this specific item number, the above invoice description makes it readily apparent that cleaning was performed in conjunction with transportation under this item. In addition, the cleaning was done prior to dutiable repairs to the hatch cover rubber packing and channels (See Item 229.1 of the invoice). Notwithstanding Texaco, supra., under which this item would be held dutiable, Customs has long-held cleaning done in preparation of dutiable repairs to be dutiable. (C.I.E.s 51/61, 429/61 and 596/62). Accordingly, Item no. 229 remains dutiable.

Item nos. 335 and 336 both cover the use of a solvent to remove oil sludge deposits from the lube oil cooler. The protestant contends that both items covered cleaning, not repairs. It is further stated that the surfaces that were cleaned were not in a deteriorated condition, nor was any restoration work performed. We note that both items contain the statement, "This is a cleaning item only, no repairs." 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., Headquarters Ruling Letter 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, Headquarters Ruling Letter 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 United States Customs Court examined whether the scraping and cleaning of Rose Boxes constituted dutiable repairs. Northern Steamship Company v. United States, 54 Cust. Ct. 92, C.D. 1735 (1965). Rose Boxes are parts fitted at the ends of the bilge suction to prevent the suction pipes from being obstructed by debris. In arriving at its decision, the court focused on
whether the cleaning operation was simply the removal of dirt and foreign matter from the boxes or whether it resulted in the restoration of the part to good condition after deterioration or decay. Id. at 98. The court determined that the cleaning did not result in the restoration of the boxes to good condition following deterioration and consequently held that the work was not subject to vessel repair duties. Id. at 99. The Customs Service has ruled that the regular cleaning of filters in most instances does not result in liability for duty. See Headquarters Ruling Letter 107323, dated May 21, 1985.

From these authorities, we determine that the costs of cleaning the lube oil cooler covered by Item nos. 335 and 336 are subject to duty under 19 U.S.C. ?1466. 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). Notwithstanding the protestant's claim to the contrary, the failure to clean oil sludge deposits from the lube oil cooler will result in a diminished engine function. The removal of these deposits through the use of a solvent results in a restoration of the lube oil cooler to good condition. Such an operation can be distinguished from cleaning a Rose Box or other filter, for the collection of debris by these parts results not in a diminution of function, but alternatively demonstrates the proper function of the part. Furthermore, in rulings letters 111821, 111822 and 111903 Customs held the removal of carbon and oil deposits from the main engine scavenger spaces to be a dutiable maintenance operation. The removal of oil sludge deposits from the lube oil cooler is akin to the removal of carbon and oil deposits from the main engine scavenger spaces. Accordingly, Item nos. 335 and 336 constitute dutiable maintenance operations.

Item no. 412 is entitled, "BOW THRUSTER" and provides as follows: "1. Checked & megger tested electric cable & bow thruster motor. 2. Tested good order." The protestant states that this cost was incurred pursuant to a mandatory regulatory requirement and cites to publication. Upon reviewing these provisions, it is apparent that the cost of this particular item was pursuant to the required boiler and drydock surveys. Accordingly, Item no. 412 is non-dutiable.

HOLDING:

As discussed in the Law and Analysis portion of this ruling, the protest is 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,

Jerry Laderberg

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