HQ 113752 - Vessel Repair; Application for relief; M/V PRESIDENT JACKSON, Voyage 79; Entry No. 110-6461898-3; Modifications; Inspection; Staging; Cleaning; Survey; Maintenance; 19 C.F.R. 4.14(d); 19 U.S.C. 1466 - United States International Trade Commision Rulings

United States International Trade Commision Rulings And Harmonized Tariff Schedule

faqs.org Rulings By Number Rulings By Category Tariff Numbers

faqs.org > Rulings and Tariffs Home > Rulings By Number > 1999 HQ Rulings > HQ 084703 - HQ 114238 > HQ 113752

Previous Ruling Next Ruling
HQ 113752

October 9, 1998

VES-13-18-RR:IT:EC 113752 LLB

CATEGORY: CARRIER

Chief, Liquidation Section
U. S. Customs Service
P. O. Box 2450
San Francisco, California 94126

RE: Vessel Repair; Application for relief; M/V PRESIDENT JACKSON, Voyage 79; Entry No. 110-6461898-3; Modifications; Inspection; Staging; Cleaning; Survey; Maintenance; 19 C.F.R. 4.14(d); 19 U.S.C. 1466

Dear Sir:

This letter is in response to your memorandum dated October 29, 1996, which forwarded for our review an application for relief from duties relating to the above-referenced vessel repair entry. Our ruling follows.

FACTS:

The vessel PRESIDENT JACKSON, a United States-flag vessel owned and operated by American President Lines (APL) of Oakland, California, arrived at the port of Seattle, Washington, on May 23, 1996. According to the vessel repair entry and other documents in the file, the vessel underwent certain work in Taiwan, Hong Kong, Japan, and South Korea.

The vessel operator has submitted an Application for Relief identifying certain items as non-dutiable modification work, certain elements as covered under subsection (h) of the vessel repair statute, and claiming that certain other items are non-dutiable as consisting of staging, required inspection, or cleaning. You request that we review fifty enumerated items in the entry and provide you with our determination as to the dutiability of those items.

ISSUE:

Whether the work described in the Law and Analysis portion of this ruling is dutiable under the vessel repair statute (19 U.S.C. 1466).

LAW AND ANALYSIS:

Section 466(a), Tariff Act of 1930, as amended (19 U.S.C. 1466(a)) provides, in pertinent part, that:

The equipments, or any part thereof ... 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 to engage in the foreign or coasting trade, or a vessel intended to be employed in such trade, shall, on the first arrival of such vessel in any port of the United States, be liable to entry and the payment of an ad valorem duty of 50 per centum on the cost thereof in such foreign country.

In its administration of the vessel repair statute, Customs 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. (See Otte v. United States, 7 Ct. Cust. Appls. 166, T.D. 36489 (1916); United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137, T.D. 44359 (1930); and Customs Bulletin and Decisions, Vol. 31, Number 40, published October 1, 1997.) The factors discussed within the cited cases are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a particular case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue of whether certain work may be a modification of a vessel which is nondutiable under the law.

While it is true that certain foreign shipyard operations such as proven modifications are considered to be non-dutiable, it is also the case that pursuant to published Customs Service rulings (C.I.E. 1325/58 and C.I.E. 565/55), duties may not be remitted in cases where invoices fail to segregate dutiable from non-dutiable expenditures. The presence of unsegregated expenses will render an entire item subject to duty as a repair expense, which item might otherwise qualify for duty-free treatment. This element comes into play in situations in which the item to be modified is in need of repair at the time the modification is performed.

In Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the U.S. Court of International Trade (CIT) considered 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 these costs were dutiable as "expenses of repairs" the court adopted the "but for" test proffered by Customs; that is, such operations were an integral part of the dutiable repair process and would not have been necessary "but for" the need to conduct dutiable repairs.

On appeal, the 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, and thus the 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.

In reaching its determination the CAFC steadfastly rejected the non-binding judicial authority relied upon by the plaintiff/appellant. Specifically, the court addressed the following court cases:

1. Mount Washington Tanker Co. v. United States, 505 F.Supp. 209 (CIT 1980) which held that transportation compensation for members of a foreign repair crew performing dutiable repairs was not dutiable as an expense of repairs;

2. American Viking Corp. v. United States, 150 F.Supp. 746 (Cust.Ct. 1956) which held that the expense of providing lighting needed to perform a dutiable repair was not dutiable as an expense of the repair; and

3. International Navigation Co. v. United States, 148 F.Supp. 448 (Cust.Ct. 1957) which held that transportation expenses for a foreign repair crew to travel to and from an anchored vessel being repaired were not dutiable as expenses of repairs.

With regard to these three cases, the CAFC stated that, "Seemingly, these expenses too would have been viewed as coming within the [vessel repair] statute if the court had used a "but for" approach." 44 F.3d 1539, 1547. The CAFC concluded, "Thus Mount Washington Tanker, like American Viking and International Navigation, was incorrectly decided." Id.

Recognizing that the decision of the CAFC was not only dispositive of the expenses at issue, but also instructive as to proper administration of the vessel repair statute with respect to the interpretation of the term "expenses of repairs" contained therein, the Assistant Commissioner, Office of Regulations and Rulings, issued a memorandum to the Regional Director, Commercial Operations, New Orleans (file no. 113308) dated January 18, 1995. That memorandum was published in the Customs Bulletin on February 8, 1995 (Customs Bulletin and Decisions, vol. 29, no. 6, at p. 59) In that memorandum, copies of which were disseminated to the other Customs field offices charged with the liquidation of vessel repair entries, it was stated that pursuant to the decision of the CAFC, a myriad of foreign repair expenses previously accorded duty-free treatment would, under certain circumstances, no longer receive such treatment. The memorandum further provided that any such affected costs contained in vessel repair entries not finally liquidated as of the date of the CAFC decision (December 29, 1994) should be liquidated as dutiable "expenses of repairs" provided they were first examined under the "but for" test discussed above.

Subsequent to the publication of the above-cited memorandum, on February 22, 1995, various representatives of U.S.-flag vessel owners/operators met with the Assistant Commissioner, Office of Regulations and Rulings, and members of his staff. It was the collective opinion of the vessel owners/operators that the memorandum should be rescinded, contending, inter alia, that it was violative of 19 U.S.C. ? 1625(c)(1) and 19 CFR Part 177. Upon further review of the matter, the Assistant Commissioner issued a second memorandum to the Regional Director, Commercial Operations Division, New Orleans (file no. 113350), dated March 3, 1995. This memorandum was published in the Customs Bulletin on April 5, 1995 (see Customs Bulletin and Decisions, vol. 29, no. 14, at p. 24). The latest memorandum clarified the January 18 issuance with respect to Customs implementation of the CAFC decision. It provided that all vessel repair entries filed with Customs on or after the date of that decision were to be liquidated in accordance with the full weight and effect of the court 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. It further provided that in view of the fact that carriers have relied upon Customs rulings (some of which were based on court cases which the CAFC in Texaco held were incorrectly decided), and because retroactive application would cause both the Government and the carriers a major administrative burden, Customs would not apply Texaco retroactively except as to the two issues directly decided by the court. All other costs contained within such entries would be accorded that treatment previously accorded them by Customs prior to the decision of the CAFC in the Texaco case. Parenthetically, we note that the CAFC decision was published in its entirety in the Customs Bulletin on March 8, 1995 (See Customs Bulletin and Decisions, vol. 29, no. 10, at p. 19).

In regard to surveys or inspections, the general rule is 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 a survey. When an inspection or survey is conducted to ascertain the extent of damage sustained or whether repairs are necessary, the survey cost is dutiable as part of the repairs which are accomplished.

Insofar as cleaning operations are concerned, Customs has held 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. Analogous to Customs position regarding the dutiability of surveys, Customs has long held that the cost of 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 (see C.I.E.'s 18/48; 125/48; 910/59; 820/60; 51/61; 569/62; and 698/62).

We now turn to consideration of the items presented, and will utilize the numbering system which the Liquidation Unit used in forwarding the application:

1. General Services. The claim is made that all of the costs associated with this category have traditionally been held to be free of duty. As explained in ample precedent, Customs considers the types of expenses associated with these costs to be proratable under the terms of the Court opinion in Texaco, supra. We find that the expenses of General Services should be prorated between dutiable and nondutiable costs as reflected on the vessel repair entry.

2. High Pressure Hull Water Wash (205). The invoice indicates hull cleaning for inspection purposes only, however, we note that the next invoice item (206) covers the cost of hull painting. As it appears that the hull washing was necessary for both purposes, it is necessary to apportion the cost of the cleaning between dutiable and non-dutiable elements.

3. Shell Connection Pipe Gauging (208). We find this expense to cover a mandatory inspection/testing process with no repair element. The item is duty-free.

4. Anchor Chain Inspection (209). The invoice reflects that this item was a nondutiable ABS/USCG inspection and that no repairs were performed. Accordingly, it is nondutiable.

5. Cargo Hold Bilge Well Cleaning (214). Bilge Wells are also known as Rose Boxes. The United States Customs Court had occasion to examine 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. The court determined that the removal of dirt and foreign matter from the boxes 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 cost of this item is not subject to duty.

6. Pintle Pin (Bush Survey) (216). The invoice reflects that this item was a nondutiable ABS/USCG inspection and that no repairs were performed. Accordingly, it is nondutiable.

7. Rudder Survey (217). Same result as item 6, above.

8. Carrier Bearing Inspection (218). Same result as item 6, above.

9. Stock Nut Survey (219). Same result as item 6, above.

10. Chain Locker Survey (222). Same result as item 6, above.

11. Ballast Deep Tank Survey (225). Same result as item 6, above.

12. Heavy Fuel Oil Wing Tank Survey (228). Same result as item 6, above.

13. M.E.L.O. Sump Tank C Survey (229). Same result as item 6, above.

14. Bow Thruster Inspection (302). Same result as item 6, above.

15. Engine and Independent Bilge Valve Inspection (304). Same result as item 6, above.

16. Propeller Inspection (307). Same result as item 6, above.

17.Tailshaft Survey (309). Same result as item 6, above.

18. Propeller Removal for Inspection (310). Same result as item 6, above.

19. Cooler, Central FCW #1 Survey (313). Same result as item 6, above.

20. Cooler, Central FCW #2 Survey (314). Same result as item 6, above.

21. Exhaust Gas Boiler (EGE) (315). Same result as item 6, above.

22. Boiler, Oil-Fired Clean for Inspection (316). Same result as item 6, above

23. Shafting and Bearing Survey (317). Same result as item 6, above.

24. Sea Valves, Chests, etc. Survey (318). Same result as item 6, above.

25. Sea Cooling Water System Inspection (320). Same result as item 6, above.

26. Bow Thruster Controller (401). Same result as item 6, above.

27.Corrugated Bulkhead FR271 Modification (501). The applicant states that "the requirement for this modification was a 'design defect' in the original construction of the vessel. The original construction created a 'hard spot' which lead to bulkhead cracking." Work performed to remedy present "bulkhead cracking" is dutiable, but there is no evidence of any need for repair at the time the modification work was performed. Accordingly, this item is not dutiable as a repair under 19 U.S.C. 1466.

28.No. 3 Cargo Hold Structural Modifications (502). The applicant states: "This again is a modification to correct an original design defect. The P/S corner of the #3 cargo hold at level 10790 above base line as originally designed was leading to structural failure problems. This modification was initiated to first strengthen the deficiency in the structure (the new insert plate is 12mm in lieu of 8mm plate thickness), but more importantly, to more evenly distribute the structural stresses by increasing the inside corner radius..." Most significantly, we find evidence in the repair yard invoice of "fractures at both Port and Stbd locations." As such, we find that this item is a dutiable repair. Based upon the information provided, we are unable to draw a meaningful distinction between this item and item 503, below.

29. Slim-Guide Bracket to Platform Modifications (503). The applicant states: "The existing brackets connecting the stantion to the container "slim-guide" fractured. Rather than just rewelding the fracture, a new design bracket was engineered, fabricated, and installed..." This item is a dutiable repair under 19 U.S.C. 1466. The fact that a new design bracket was engineered does not change this result since it was also necessary to repair a fracture as part of the process.

30. Hatch Coaming Stays Modification (504). The applicant states: "A new 'toe piece' was designed to correct this design defect to better distribute the stresses by way of the 160mm radius of the toe piece and the 30mm radius toe with a wrap-around weld." We find that this item is a nondutiable modification.

31. Web Frame 310 Bracket Modifications (505). First time installation of a feature, permanently installed. The item is non-dutiable.

32. High (Aux) Sea Chest Vent Modification (506). The applicant states: "The initial location of the 80mm vent line in the bay between frames 99-100 was not removing the entrapped air generated in the bay between frames 98-99. This entrapped air was causing operational problems in the sea water circulator pump. To correct this design defect problem, it was necessary to make this modification for efficient operation of the vessel." We find that this item is a nondutiable modification.

33. Anchor Pocket Modification (507). The applicant states: "... there has [sic] been problems with the anchor stowage...Enc. (L) details to [sic] structural modifications engineered to correct this deficiency and to improve the existing anchor stowage system." We find that this item is a nondutiable modification.

34. Web Frame Lug/Clip Modifications (508). The applicant states: "This is a new, previously non-existent 15mm steel plate bracket permanently installed by welding with a 6mm fillet weld wrapped around all ends." We find that this item is a nondutiable modification.

35.Main Engine Charge Air Cooler Clean System (510). The invoice reflects, and the applicant states, that this item is a "new, previously non-existent system." We find that this item is a nondutiable modification.

36.Category B Items, General Services (121,123, 127 and 132). These are charges for telephone calls, shore power, fresh water, and ballast water which should be apportioned as between the dutiable and non-dutiable expenses found in the entry as a whole.

37.C.O. #1, Bow Thruster Service Engineer. This cost is dutiable. The applicant states that the bow thruster service representative is a U.S. citizen and resident, and that the cost associated with the engineer should be nondutiable. The applicant has not provided sufficient information with respect to its claim of nondutiability. For example, if the applicant is attempting to claim that the subject cost is subject to remission pursuant to 19 U.S.C. 1466(d)(2), complete information with respect to that claim must be provided. The pertinent invoice reflects that the engineer performed services with respect to the "MV President Adams item #302 and 303." While item 302 has been found by the Liquidation Unit to be nondutiable, item 303 is listed as dutiable on the spreadsheet, and that item is not involved in this application.

38. C.O. #2, No. I Deep Tank Modifications. The applicant claims that prefabricated steel is non- dutiable under 19 U.S.C. 1466(h)(3), which provides:

The duty imposed by section (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 Schedules of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country.

For the purpose of 19 U.S.C. 1466(h), we have found that a part is determined to be something which does not lose its essential character or its identity as a distinct entity but which, like materials, is incorporated into a larger whole. It would be possible to disassemble an apparatus and still be able to identify a part. The term part does not mean part of a vessel, which practically speaking would encompass all elements necessary for a vessel to operate in its designed trade. Examples of parts as defined are seen in such items as piston rings and pre-formed gaskets, as opposed to gaskets which are cut at the work site from gasket material.

There is no indication or statement as to which "spare parts" the applicant seeks relief for pursuant to 19 U.S.C. 1466(h)(3). The applicant has not established that the prefabricated steel is a part under 19 U.S.C. 1466(h)(3). Therefore, the steel is dutiable under 19 U.S.C. 1466(a). Our determination and analysis is the same here as in Ruling 113883 dated April 1, 1997.

39. C.0. #3, Examination of Main and Emergency Switchboards. The applicant states that this is a mandatory regulatory requirement. We find that this item is nondutiable.

40. C.O. #5, Hull Thickness Gauging for ABS Hull Special Survey #2. Same result as item 39, above.

41. C.O. #6, F.O. Tank Cleaning 5F(s), 5A(P/S), 6A(P/S). This is a cleaning operation which is segregated from the cost of associated repair. The item is duty-free.

42. C.O. #10, Rudder Stock Carrier Bearing Packing. It is claimed that this should be a duty-free item under the terms of subsection (h)(3) of the vessel repair statute. The applicant confirms that the item in question is "material." Since (h)(3) contemplates pre-entry installation of "parts" only, the cost of this item is subject to vessel repair duty.

43. C.O. #11, Reefer Transformer Cleaning. This is a cleaning operation with no accompanying repair. The item is duty-free.

44. C.O. #12, Low Level Alarm Switch in M/E Lube Oil Sump Tank. This item involves the relocation of an existing feature, and is thus considered a modification which is not subject to duty.

45. C.O. #14, Additional Hatch Coaming Stays. This involves the addition of eight more stays, permanently installed. No repairs are noted. The item is duty-free.

46. C.O. #21, Number 7A Cargo Hold Bracket Modification. This item involves the renewal of the radar reflector extension piece. This element suggests a repair, and the item is dutiable.

47. C.O. #24, Fifth Deck Ladderway Access Modification. We note mention of a 60mm fracture in the invoice for this item. The item is subject to duty.

48. C.O. #25, Number 7 Cargo Hold Bracket. This involves a lower bracket modification which is not subject to duty.

49. C.O. #31, Number 3 Cargo Hold Modification. This involves a modification with no repair noted. The item is not subject to duty.

50. Item No. 23 (CF 226) International U/W Paint. The applicant claims non-dutiability under 19 U.S.C. 1466(h)(2), which provides:

The duty imposed by subsection (a) of this section shall not apply to-

... (2) the cost of spare repair parts or materials (other than nets or nettings) which the owner or master of the vessel certifies are intended for use aboard a cargo vessel, documented under the laws of the United States and engaged in the foreign or coasting trade, for installation or use on such vessel, as needed, in the United States, at sea, or in a foreign country, 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...

Section 1466(h)(2) contemplates consumption entry of the pertinent part or material, and the payment of duty under the appropriate commodity classification of the HTSUS prior to the use of the pertinent part or material in the foreign shipyard. The applicant has provided no information which would support a claim that the subject paint was entered and duty-paid prior to its use in the foreign shipyard. Accordingly, the applicant's claim for treatment under 19 U.S.C. 1466(h)(2) is denied. The paint is dutiable under 19 U.S.C. 1466(a).

HOLDING:

Following a thorough analysis of the facts as well as of the law and applicable precedents, we have determined that the Application for Relief should be granted in part and denied in part as specified in the Law and Analysis portion of this ruling.

Sincerely,

Jerry Laderberg
Chief,
Entry Procedures and Carriers Branch

Previous Ruling Next Ruling