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HQ 226873





October 29, 1996
VES-13-18-RR:IT:EC 226873 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. C31-0015281-9; 19 U.S.C. 1466; ARCO CALIFORNIA, V-315; Petition; Texaco Marine Services v. U.S.; 19 U.S.C. 1315(d), 1625(c); Drydocking charges; Proration; Sea trials

Dear Sir:

This is in response to your memorandum dated March 25, 1996, which forwarded the petition submitted by ARCO Marine, Inc. ("petitioner") with respect to the above-referenced vessel repair entry.

FACTS:

The ARCO CALIFORNIA ("the vessel") is a U.S.-flag vessel owned and operated by the applicant. Certain foreign shipyard work was performed on the vessel in 1995. The vessel arrived at the port of Valdez, Alaska on June 26, 1995. The subject entry was subsequently filed in a timely fashion.

ISSUE:

Whether the subject costs 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.

Petitioner's Claims with respect to 19 U.S.C. 1315(d) and 19 U.S.C. 1625(c)

In its petition, the petitioner raises the issues as to whether Customs violated 19 U.S.C. 1315(d) and 19 U.S.C. 1625(c). We have dealt with these issues previously.

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).

Memorandum 113350 was preceded by Memorandum 113308 dated January 18, 1995. Memoranda 113350 and 113308 were both published in the Customs Bulletin.

In Ruling 113474 dated October 24, 1995, we stated:

... the applicant contends that the CAFC decision in Texaco, supra, should not be applicable to the subject vessel repair entry and by doing so Customs has violated 19 U.S.C. ? 1315(d). Title 19, United States Code, ? 1315(d) provides, in pertinent part, as follows:

No administrative ruling resulting in the imposition of a higher rate of duty or charge than the Secretary of the Treasury shall find to have been applicable to imported merchandise under an established and uniform practice shall be effective with respect to articles entered for consumption or withdrawn from warehouse for consumption prior to the expiration of thirty days after the date of publication in the Federal Register of notice of such ruling... (emphasis added)

The applicable Customs Regulations governing this matter are found at 19 CFR Part 177 (entitled "Administrative Rulings"). With respect to the applicability of 19 CFR Part 177, we note that neither of the two Headquarters memoranda published in the Customs Bulletin are "rulings" within the meaning of that part. Pursuant to ? 177.1(d)(1), Customs Regulations, a "ruling" is defined as a "...written statement issued by the Headquarters Office or the appropriate office of Customs as provided in this part that interprets and applies the provisions of the Customs and related laws to a specific set of facts." (Emphasis added) Neither memorandum applied 19 U.S.C. ? 1466 or 19 CFR ? 4.14 (the applicable Customs regulations promulgated pursuant to ? 1466) to a specific set of facts (i.e., no single vessel repair entry containing foreign expenses was discussed). Rather, they provided notice to the public that Customs will administer 19 U.S.C. ? 1466 in accordance with the explicit guidelines set by the CAFC in interpreting the term "expenses of repairs" within the meaning of the statute as determined by the "but for" test. Such guidelines, prior to the date of that decision, were non-existent. Accordingly, 19 U.S.C. ? 1315(d) is inapplicable in these circumstances.

In Ruling 113500 dated October 24, 1995, we stated:

Specifically, the applicant contends that the publication in the Customs Bulletin of memorandum 113308, subsequently clarified by memorandum 113350, without the solicitation of public comments, constitutes a violation of 19 U.S.C. ? 1625(c).
...
... the aforementioned memoranda did not modify or revoke any prior interpretive ruling or decision or have the effect of modifying the treatment Customs previously accorded certain foreign expenses under 19 U.S.C. ? 1466. Rather, the memoranda, in conjunction with the publication of the CAFC decision in the Customs Bulletin, merely provided notice to the public that the impetus behind any change in Customs interpretation of the term "expenses of repairs" within the meaning of the vessel repair statute is the CAFC itself, not Customs.
...
With respect to the applicability of 19 CFR Part 177, we note that neither of the two Headquarters memoranda published in the Customs Bulletin are "rulings" within the meaning of that part. Pursuant to ? 177.1(d)(1), Customs Regulations, a "ruling" is defined as a "...written statement issued by the Headquarters Office or the appropriate office of Customs as provided in this part that interprets and applies the provisions of the Customs and related laws to a specific set of facts." (Emphasis added) Neither memorandum applied 19 U.S.C. ? 1466 or 19 CFR ? 4.14 (the applicable Customs regulations promulgated pursuant to ? 1466) to a specific set of facts (i.e., no single vessel repair entry containing foreign expenses was discussed). Rather, they provided notice to the public that Customs will administer 19 U.S.C. ? 1466 in accordance with the explicit guidelines set by the CAFC in interpreting the term "expenses of repairs" within the meaning of the statute as determined by the "but for" test. Such guidelines, prior to the date of that decision, were non-existent.

Further in regard to the applicability of 19 CFR Part 177, it is noteworthy that since neither memorandum was a "ruling" as defined in 19 CFR ? 177.1(d), the mere fact that they were published in the Customs Bulletin does not, as the protestant suggests, render either a "published ruling" within the meaning of 19 CFR ? 177.1(d). Furthermore, in view of the fact that 19 CFR ? 177.1(d) also defines a "ruling letter" as "a ruling issued in response to a written request therefor and set forth in a letter addressed to the person making the request or his designee", neither memoranda, which were issued at the behest of the Assistant Commissioner, Office of Regulations and Rulings to the Regional Director, Commercial Operations Division, New Orleans, constituted a "ruling letter" for purposes of 19 CFR Part 177. The delayed effective date provisions of 19 CFR ? 177.9(d)(3), applicable to a "ruling letter" are therefore of no consequence.

Accordingly, the provisions of 19 U.S.C. ? 1625 and 19 CFR Part 177 are inapplicable to the subject application.

Based on the above authorities, we find that the petitioner's claims with respect to 19 U.S.C. 1315(d) and 1625(c) are without merit.

Proration Issue

In your forwarding memorandum, you ask for our review with respect to the following items which you have prorated in accordance with Ruling 113474 dated October 24, 1995: tank pumping, drydocking, liability insurance, fuel, cranage, temporary lighting, lay berthing, material handling, transportation, pump ballasting, fire watch, staging, ventilation, lighting, and inspection costs for ventilation and lighting.

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. As stated supra, in Memorandum 113350 dated March 3, 1995, 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 accordance with Ruling 113474 and Memorandum 113350, and as your forwarding memorandum states, 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.

With the exception of liability insurance, all of the costs listed in the first paragraph of this section (Proration Issue) of this ruling are "drydock costs" within the meaning of that term as used in Ruling 113474 such that they are to be prorated as described supra.

The liability insurance is an overhead cost. In Ruling 113122 dated March 20, 1996, we stated as follows with respect to overhead:

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.]

Inclusion of 19 U.S.C. 1466(h)(3) Duties in Proration Calculation

The petitioner claims that the costs with respect to duties assessed pursuant to 19 U.S.C. 1466(h)(3) should not be included in the proration calculation, as described supra.

19 U.S.C. 1466(h)(3) provides:

The duty imposed by subsection (a) of this section shall not apply to -
(3) the cost of spare parts necessarily installed before the first entry into the United States, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff Schedule of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country.

We disagree with the petitioner's claim. Duty assessed under 19 U.S.C. 1466(h)(3) is vessel repair duty (i.e., 19 U.S.C. 1466 duty), albeit assessed at a rate of duty different from the fifty percent rate of 19 U.S.C. 1466(a). As such, the dutiable amount with respect to duty assessed under 19 U.S.C. 1466(h)(3) is to be included in the dutiable component for the purpose of the proration calculation which is described supra on pages four through six of this ruling.

Sea Trials

The petitioner claims that the sea trials (item 010, invoice page 018) "... are not subject to duty, or, are subject to complete remission. At the very least, the cost of the sea trials should be subject to proration."

The invoice states, in part: "When work are completed [sic] and vessel is ready to sail, furnish shipyard services of two (2) machinists, two (2) pipe fitters, and one (1) electrician to go to sea for approximately a four (4) trial run."

In Ruling 113187 dated September 13, 1994, we stated in pertinent part: "It has long been Customs position that sea trials are dutiable if done as a result of dutiable repairs. (See Customs rulings 107106, 107847, 108858 and 110197.)"

A sea trial is the type of item that is dutiable as an item incident to a repair. For example, after repairs are effected, a sea trial will be performed to determine if the vessel is operating properly. The petitioner has not provided evidence to support its claim that the sea trial is nondutiable or to establish that the sea trials were not performed incident to repairs. Accordingly, this item is dutiable.

HOLDING:

The Holdings of this ruling are as stated supra.

Sincerely,

Chief,
Entry and Carrier Rulings Branch


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