HQ 114517 - Vessel repair; Modification; Repair; Vessel ARCO CALIFORNIA; Entry No. C31-0005039-3; Arrival in Valdez, Alaska, June 5, 1998 - United States International Trade Commision Rulings

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HQ 114517

October 27, 1998

VES-13-18-RR:IT:EC 114517 LLB

CATEGORY: CARRIER

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

RE: Vessel repair; Modification; Repair; Vessel ARCO CALIFORNIA; Entry No. C31-0005039-3; Arrival in Valdez, Alaska, June 5, 1998

Dear Sir:

Reference is made to your memorandum requesting that we review the Application for Relief submitted by Arco Marine, Inc., in connection with the above-captioned vessel repair entry. The ruling which follows contains our recommendations.

FACTS:

The vessel ARCO CALIFORNIA underwent extensive shipyard operations while in the port of Ulsan, South Korea, between April 18 and May 26, 1998. Numerous items have been submitted for our review and consideration. These items are as follows:

1. Item 004, cost of handling parts and materials. 2. Item 214, claimed modification to superheater outlet piping .
3. Item 217, re-piping port and starboard boiler constant blow lines.
4. Item 227, new boiler water level sensing connections. 5. Item 312.01, new IGS seal water pump . 6. Item 313.01, new mechanical seal assemblies on main feed pumps.
7. Item 323.01, claimed modification to hydraulic oil sump tank.
8. Item 323.02, blanks for hydraulic flanges. 9. Item 323.03, shortening hydraulic suction lines. 10. Item 328, claimed modification to auxiliary exhaust steam dump.
11. Item 332, claimed modification for steam stripper crossover line.
12. Item 421, claimed modification to IGS scrubber sea water supply line.
13. Item 434, claimed modification for accommodation ladder installation and coating.
14. Item 434.01, claimed modification for air piping to new accommodation ladder.
15. Item 435, claimed modification for installation of ramp over spill containment.
16. Item 436, claimed modification to roller chocks. 17. Item 437, cost of work to the rope scuttle. 18. Item 447, claimed modification for installation of pilot ladder reel.
19. Item 909, cost of installation of rain water deck collection system.
20. Item 909.1, cost of hot dip galvanizing water collection system piping.
21. Item 910, claimed modification to boiler economizer. 22. Item 911, claimed modification to cargo and ballast tank structure.
23. Item 911.01, claimed modification to under deck transverse web frames.

ISSUE:

Whether the costs associated with the above enumerated items are considered dutiable under the vessel repair statute, including judicial and administrative precedents.

LAW AND ANALYSIS:

Title 19, United States Code, section 1466, provides in pertinent part for payment of duty in the amount 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 engage in such trade.

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:

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).

With respect to this Application for Relief we note the claims for duty-free treatment concerning general port and shipyard services contained within the entry and presented as item number one. In regard to these costs, since they may be related to both dutiable and non-dutiable work in a manner which cannot be segregated, it is our position that such costs must be prorated between the dutiable and non-dutiable costs contained within this entry in keeping with the "but for" test articulated by the Court in the Texaco decision as previously discussed. Since it is not possible to specifically allocate these costs which span the entire foreign shipyard period to either dutiable or non-dutiable elements, the only means by which they can be fairly considered is to apportion them between the two.

We have thoroughly reviewed the case file and find statements from the Master and the Chief Engineer, as well as detailed shipyard invoices. Evidence deduced from these sources leads us to conclude with respect to items 2 through 16, and 18 through 23, that they all meet the definition of permanent modification to the hull and fittings. They involve either first time installations or upgraded replacements of existing elements which are shown to have been in good working order at the time of their replacement. They are, therefore, considered to be free of duty under the vessel repair statute.

With respect to item 1 which is claimed as a service expense not involving a repair or equipment purchase, we find that there is no attribution regarding the use of the parts and materials in either non dutiable modification work or in repair operations. As such, the apportionment formula as discussed above must be applied to this item.

Although item 17 was identified for our review, we note that the vessel operator has not claimed relief for the cost of the item and we find no independent justification for granting such relief. The cost of the item is, therefore, subject to duty

HOLDING:

Following a thorough review of the facts and an analysis of the law and applicable precedents, we have determined that the questions of dutiability under the vessel repair statute in this case should be resolved as outlined in the Law and Analysis portion of this ruling.

Sincerely,

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